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Chicago: May 2018

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Beige Book Report: Chicago

May 30, 2018

Summary of Economic Activity
Growth in economic activity in the Seventh District remained at a moderate pace in April and early May, and contacts expected growth to continue at that pace over the next 6 to 12 months. Manufacturing production increased strongly, employment grew moderately, consumer and business spending rose modestly, and construction and real estate activity increased slightly. Wages and prices increased modestly and financial conditions improved modestly. The outlook for farm income brightened, due largely to improvements in the crop sector.

Employment and Wages
Employment growth remained 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 production and on professional and technical workers. As they have for some time, contacts indicated that the labor market was tight and reported difficulties filling positions at all skill levels. There continued to be reports from manufacturing and construction firms that they had delayed or turned down projects because of difficulties in finding workers. There were also reports of firms choosing not to lay off workers during production lulls so that they would not have to find new workers when activity picked up again. Wage growth remained modest overall, though a number of contacts noted that wage pressures had intensified in recent months, and there were more reports of pay increases for production workers. Most firms reported rising benefits costs.

In general, prices rose modestly in April and early May, and contacts expected prices to continue to increase at that rate over the next 6 to 12 months. Retail prices were flat overall, though there were reports of price increases in the home improvement and the lawn and garden segments. One contact indicated that retail pricing was "highly competitive." Producer prices rose modestly, reflecting in part the pass-through of higher labor, materials, and freight costs. Numerous contacts noted that freight costs had increased dramatically.

Consumer Spending
Consumer spending increased modestly over the reporting period. Nonauto retail sales rose slightly, with gains reported in the furniture, appliances, home improvement, and personal services segments. One contact noted an increase in purchases using credit, particularly for durable goods. Contacts were generally optimistic about the coming summer sales season. Light vehicle sales rose slightly. The sales mix of new light vehicles continued to shift toward light trucks, particularly toward crossover utility vehicles. Used vehicle sales increased modestly.

Business Spending
Business spending increased modestly in April and early May. Retail contacts indicated that inventories were generally at comfortable levels. Most manufacturing contacts did so as well, though some noted that strong demand had led to shortages of some of their products and others said that lead times from parts and materials suppliers had increased. 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. Dealers reported that sales of medium-duty trucks remained robust. Contacts again indicated that lead times for purchasing new equipment had increased. Demand for energy by commercial and industrial users increased modestly. Demand for transportation services increased moderately from an already high level.

Construction and Real Estate
Construction and real estate activity increased slightly over the reporting period. Residential construction increased slightly, led by growth in suburban single-family homebuilding. Multiple contacts noted strong demand for single-family starter homes but stated that low inventories continued to hold back sales. Prices were up notably in this market segment. In contrast, demand and prices for higher-end homes changed little. Contacts also indicated that rising labor and materials costs were making it difficult for homebuilders to turn a profit. Nonresidential construction was little changed overall, though contacts again said they expected building to pick up in the coming months because vacancy rates were low, particularly in the industrial segment. Commercial real estate activity was flat but at a strong level. Commercial rents, vacancy rates, and the availability of sublease space were all unchanged.

Growth in manufacturing production continued at a strong rate in April and early May. Steel production increased moderately, in response to steady end-user demand. Imports slowed after the steel and aluminum tariffs were enacted, and contacts noted ongoing uncertainty about whether there would be further changes in tariffs policy. Demand for heavy machinery increased strongly, reflecting both end-user demand and dealers rebuilding inventories. Demand for heavy trucks remained at a high level and one contact noted that heavy truck producers were running at close to full capacity. Order books for specialty metals manufacturers increased modestly. Manufacturers of construction materials continued to report slow but steady increases in shipments, in line with the pace of improvement in construction. Auto production increased modestly and remained at a solid level.

Banking and Finance
Financial conditions improved modestly over the reporting period. Financial market participants reported little change in equities prices or volatility but some increase in interest rates. Business loan demand increased slightly, led by growth in small business lending. Loans were primarily for financing real estate and capital equipment. While competition remained strong, contacts reported little change in lending standards or loan quality. Consumer loan demand increased modestly, driven by increases in residential mortgage activity. Consumer loan quality and lending standards were little changed.

The outlook for farm income for 2018 brightened again, with improvements concentrated in the crop sector. Nonetheless, several contacts expressed unease over the potential impact of international trade policies on the farming sector. After weather-related delays, corn and soybean planting proceeded quickly in Illinois and Indiana, to the point that it was running ahead of normal progress. However, Iowa and Wisconsin were somewhat behind their typical paces for planting. Corn prices rose during the reporting period, while soybean prices drifted down. Dry weather and the late spring hindered the development of pastures, which led to shortages of and higher prices for hay, cutting into margins for some livestock producers. Cattle and egg prices were down, but hog and dairy prices moved up. Dairy prices were still quite low, however, and there were reports of a bump up in operators exiting the sector.

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