Beige Book Report: Chicago
April 18, 2018
Summary of Economic Activity
Growth in economic activity in the Seventh District continued at a moderate pace in late February and March and contacts expected growth to continue at that pace over the next 6 to 12 months. Employment, consumer spending, and manufacturing production increased moderately, and business spending and construction and real estate activity grew slightly. Wages and prices increased modestly and financial conditions improved slightly on balance. Income prospects for the agricultural sector improved a bit, in spite of concerns about the impact of Chinese tariffs.
Employment and Wages
Employment growth continued at a moderate pace over the reporting period and contacts expected gains to continue at that rate over the next 6 to 12 months. Hiring was focused on professional and technical, production, and sales workers. As they have for some time, contacts indicated that the labor market was tight and reported difficulties filling positions at all skill levels. A number of manufacturers reported that because of the difficulty in finding production workers, they were being more picky about which orders to fill and investing more in automation. One contact reported increasing production at their China plant because they couldn't find workers for their US operation. Wage growth remained modest overall, though more contacts reported pay increases for administrative workers. In spite of the modest overall growth, a number of contacts (particularly in manufacturing) noted that wage growth had picked up compared to six months ago, especially for entry-level workers. Most firms reported increased benefits costs.
Prices
Overall, prices rose modestly in late February and March, and contacts expected prices to continue to increase at that rate over the next 6 to 12 months. Retail prices again increased slightly overall, though grocery prices were flat. Producer prices rose modestly, reflecting in part the pass-through of higher labor, materials, and freight costs. Manufacturers facing higher steel and aluminum costs because of the new tariffs expected to pass on about half of the increased costs to their customers on average.
Consumer Spending
Consumer spending increased moderately over the reporting period. Nonauto retail sales rose modestly, with gains reported in the home furnishings, building materials, home improvement, and general merchandise segments. Contacts continued to report strong e-commerce growth. New light vehicle sales increased considerably, helped by stronger incentives, particularly for leases. One contact called the incentives for some vehicles "a little irrational." Contacts generally expected the sales pace to slow in the coming months. Used vehicle sales also increased considerably. The sales mix of new light vehicles again shifted toward light trucks.
Business Spending
Business spending increased modestly in late February and March. Retail and manufacturing contacts indicated that inventories were generally at comfortable levels. Capital spending increased modestly, and contacts expected growth to continue at that pace over the next 6 to 12 months. Outlays were primarily for replacing industrial and IT equipment and for renovating structures. A number of manufacturing contacts reported that lead times for purchasing new equipment were notably longer than six months ago. Demand for commercial and industrial energy increased modestly and transportation demand increased moderately.
Construction and Real Estate
Construction and real estate activity increased modestly over the reporting period. Residential construction rose modestly, led by expanded suburban single-family building. Contacts again reported that rising labor and materials costs were squeezing margins. Overall, home sales were down slightly as low inventories of starter homes continued to hold back sales. Home prices rose modestly overall, with notable increases in the starter home segment and no change in prices for higher-end homes. Nonresidential construction increased modestly, with growth spread across sectors. That said, contacts expected growth to pick up over the next 6 to 12 months because vacancy rates for office and industrial space are low. Commercial real estate activity increased slightly from an already strong level, and contacts expected activity to increase slightly further over the next 6 to 12 months. Numerous contacts characterized the commercial real estate environment as "very good" or "exuberant." Commercial rents were flat overall. And while there was a slight decline in vacancy rates, the availability of sublease space increased a bit.
Manufacturing
Growth in manufacturing production continued at a solid rate in late February and March. Steel production increased at a moderate pace, primarily in response to steady end-user demand. Steel imports spiked in anticipation of the 25% tariff imposed in late March. Demand for heavy machinery increased strongly, as end-user demand expanded and dealers rebuilt inventories. Demand for heavy trucks remained at a strong level. Order books for specialty metals manufacturers increased modestly: growth was spread across a wide variety of sectors, with particularly strong growth 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, but remained at a solid level.
Banking and Finance
Financial conditions improved slightly over the reporting period. Financial market participants noted higher volatility compared to the beginning of the year and rising short-term interest rates. Business loan demand increased modestly, led by growth in the small business segment. One contact noted that manufacturers throughout the District were increasing their credit line utilization. While competition remained strong, contacts reported little change in lending standards or loan quality. Consumer loan demand also increased modestly, with contacts reporting rising demand for auto loans, lines of credit, and loans secured by durable goods. Residential mortgage activity picked up, and a contact in northern Indiana reported a notable increase in the number of mortgages for new home construction. Consumer loan quality and lending standards were little changed.
Agriculture
Income prospects for the agricultural sector improved a bit during the reporting period, in spite of concerns about the impact of Chinese tariffs. Corn and soybean prices moved higher (helped by weather concerns in Argentina) and allowed farmers to lock in modest profits for at least a portion of their crops this year. Moisture profiles for most of the District improved, though drought persisted in a portion of Iowa. Prospects for livestock operations dimmed some as cattle and hog prices declined and milk prices stayed low. Egg prices and prices for some dairy products did move up. Agricultural lenders continued to report a slowly rising number of financially stressed crop and livestock borrowers. Cash rents for cropland were lower than a year ago, but land values were stable overall.
For more information about District economic conditions visit: chicagofed.org/cfsbc