Beige Book Report: Chicago
July 18, 2018
Summary of Economic Activity
Growth in economic activity in the Seventh District slowed to a modest pace in late May and June, though contacts expected it to pick up to a moderate pace over the next 6 to 12 months. Manufacturing production increased moderately, while employment, consumer spending, business spending, and construction and real estate activity grew modestly. Wages and prices increased modestly, and financial conditions improved modestly. The outlook for agricultural income dimmed some as prices for most commodities fell.
Employment and Wages
Employment growth slowed to a modest 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 professional and technical workers, though there was also an increase in the number of firms seeking to hire 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. Manufacturers continued to report that they had delayed or turned down projects because of difficulties in finding workers. A staffing firm that primarily supplies manufacturers with production workers reported no change in billable hours. Wage growth remained modest overall, with wage increases most likely to be reported for managerial, professional and technical, and production workers. Most firms reported rising benefits costs.
Prices
The pace of price increases edged up in late May and June, but remained modest overall. Contacts expected prices to continue to rise modestly over the next 6 to 12 months. Retail prices increased slightly overall. Producer prices rose modestly, reflecting in part the pass-through of higher labor, materials, energy, and freight costs. Contacts in the agricultural sector noted heightened price volatility related to uncertainty over U.S. and foreign tariff policies.
Consumer Spending
Consumer spending increased modestly over the reporting period. Nonauto retail sales rose modestly, with gains in the grocery, hardware, home improvement, jewelry, and personal services segments and declines in the furniture and sporting goods segments. Light vehicle sales increased slightly and used vehicle sales rose moderately. A number of contacts indicated that vehicle sales for the first half of 2018 had exceeded expectations.
Business Spending
Business spending increased modestly in late May and June. Retail contacts indicated that inventories were generally at comfortable levels. Most manufacturing contacts did so as well, though a fabricated metals contact indicated that inventories were low because many of his firm's suppliers were capacity constrained. In addition, steel service center inventories remained below historical norms. 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. Contacts again indicated that lead times for purchasing new equipment were elevated. Demand for energy from commercial and industrial users increased modestly, and demand for transportation services increased moderately from an already high level.
Construction and Real Estate
Construction and real estate activity increased modestly over the reporting period. Residential construction increased slightly, led by growth in suburban single-family homebuilding. Home sales were up modestly overall, though a contact in the Detroit area reported slower sales. Contacts across the District indicated that low inventories of starter homes continued to hold back sales. Home prices increased moderately overall and rents rose modestly. The pace of nonresidential construction was little changed. Commercial real estate activity increased modestly, led by growth in the industrial sector. One contact noted that demand for office space from technology firms was strong. Commercial rents increased modestly, vacancy rates declined modestly, and the availability of sublease space increased slightly.
Manufacturing
Manufacturing production increased at a moderate rate in late May and June. A number of contacts across manufacturing sectors reported operating at or near capacity. Steel production increased moderately in response to steady end-user demand and declining imports. One contact said that demand for domestic steel was the strongest it had been in 20 years. Demand for heavy machinery and heavy trucks continued to grow at a solid pace. Order books for specialty metals manufacturers increased modestly, helped by 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 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 short-term interest rates. Business loan demand increased slightly, with growth predominantly coming from small businesses. Loans were primarily for financing real estate and capital equipment. One contact noted slightly higher balances on business lines of credit due to higher input costs for energy and metals. Loan quality and lending standards were little changed. Consumer loan demand also increased slightly, driven by increases in loans for autos and other durable goods and in mortgages. Consumer loan quality and lending standards were little changed. Contacts reported a high level of competition for both business and consumer loans.
Agriculture
The outlook for agriculture income dimmed some over the reporting period as prices for most commodities fell. Crop farmers reported that in general, field conditions were excellent and better than last year. Both corn and soybean prices fell, reducing expected profits from the upcoming harvest. Livestock farmers continued to struggle overall, with some reports of asset sales by hog producers and closures of dairy operations. Contacts throughout the District expressed heightened concerns about the impact of trade disputes and tariffs on the agricultural industry.
For more information about District economic conditions visit: chicagofed.org/cfsbc