Beige Book Report: Chicago
January 17, 2018
Summary of Economic Activity
Growth in economic activity in the Seventh District picked up to a moderate pace in late November and December and contacts expected growth to continue at that pace over the next 6 to 12 months. Employment, consumer spending, and manufacturing production increased moderately, construction and real estate activity rose slightly, and business spending was unchanged. Wages increased modestly, prices rose slightly, and financial conditions improved some. Crop and dairy farmers continued to face challenging conditions.
Employment and Wages
Employment increased at a moderate pace over the reporting period, and contacts expected it to continue at that rate over the next 6 to 12 months. Contacts continued to indicate that the labor market was tight, with difficulties filling positions at all skill levels. Hiring was focused on professional and technical, production, and sales workers. There was a notable increase in the number of firms looking to hire professional and technical workers, and a staffing firm that primarily supplies manufacturers with production workers reported an increase in billable hours for the first time in many months. Wage increases were spread across most occupation categories. Wage growth remained modest overall, though the number of contacts reporting increases for production workers continued to climb and a number of manufacturers reported raising their starting wages. In addition, most firms reported higher benefits costs.
Prices
Overall, prices increased slightly in late November and December. Retail prices were little changed for most categories, though one large grocery chain reported slight price declines. A number of contacts indicated that raw materials prices had risen.
Consumer Spending
Consumer spending rose at a moderate pace over the reporting period. Growth in non-auto retail sales picked up to a moderate pace, as holiday sales outpaced expectations. One contact indicated that holiday sales were the best in many years. Contacts reported gains in the electronics, appliances, building supply, tourism, and personal service sectors, but declines in the food and beverage sector. Growth in e-commerce remained strong. New light vehicle sales in the District were flat in spite of generous incentives. Used vehicle sales were also flat. Dealers expected new light vehicle sales in 2018 to be about the same as in 2017.
Business Spending
Business spending was little changed in late November and December. Retail contacts indicated that inventories were generally at comfortable levels. While one auto dealer noted that, with the pickup in light vehicle sales in the final months of the year, inventories had finally returned to a comfortable level, another said that its inventory of crossovers was so low that it may not be able to meet demand in January. Manufacturing inventories were also generally at comfortable levels, with the exception of steel service centers, where inventories remained below historical norms. Capital spending was little changed, though contacts expected spending to grow at a moderate pace over the next 6 to 12 months. Outlays were primarily for replacing industrial and IT equipment and for renovating structures. Demand for residential, commercial, and industrial energy and for transportation services all increased slightly.
Almost all contacts thought that the Federal tax bill would have a positive impact on their firms. Most respondents expected to spread the tax savings across outlays for capital, labor, debt repayment, and profit distributions to owners.
Construction and Real Estate
Construction and real estate activity increased slightly over the reporting period. Residential construction increased modestly and contacts expected growth to pick up to a moderate pace over the next six to twelve months. New building was concentrated in the single family segment in suburban locations. Overall, home sales remained flat--low inventories in the starter home segment restrained sales, while sales of higher-end homes moved up. Home prices rose slightly overall, with stronger increases in the starter home segment. The pace of nonresidential construction was little changed, but contacts expected a slight pickup over the coming year. Commercial real estate activity increased slightly from an already strong level, and contacts expected modest gains going forward. One contact noted that most lenders are maintaining conservative loan-to-value ratio requirements. Commercial vacancy rates decreased slightly overall, but more so for office space. Commercial rents increased a bit.
Manufacturing
Growth in manufacturing production picked up to a moderate rate in late November and December. Steel production increased at a strong pace as imports fell and service centers struggled to replenish already low inventories in response to solid end-user demand. One steel producer said demand was the strongest it had been in 10 years. Order books for specialty metals manufacturers increased moderately--growth was spread across a wide variety of sectors, with particularly strong demand from the oil and gas sector. Manufacturers of construction materials continued to report slow but steady increases in shipments, in line with the pace of improvement in construction. Auto production was flat.
Banking and Finance
Financial conditions improved slightly over the reporting period. Financial market participants noted that volatility continued to be low. Business loan volume increased slightly, with growth spread across sectors. Contacts reported little change in loan quality or lending standards, though one contact noted that competition for loans was strong and that they had lost deals to lenders offering looser terms and lower rates. Consumer loan volume also increased slightly, led by growth in auto loans. Consumer loan quality and lending standards were little changed.
Agriculture
Crop and dairy producers faced further belt-tightening at the start of 2018, while cattle and hog producers were in relatively better shape, owing to the underlying trends in prices received. Soybean prices dipped and corn prices rose over the reporting period, but both remained below last year's levels as plentiful stocks kept a lid on prices. Looking ahead, lower fertilizer costs and slightly lower farmland rents provided limited improvement to crop producers' profit expected margins. Contacts indicated that challenging conditions had led to more financing requests from crop producers. Dairy producers also struggled, and some smaller and less efficient operations closed down. Cattle, egg, and hog prices moved higher, to the point that producers could earn profits.
For more information about District economic conditions visit: chicagofed.org/cfsbc