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Chicago: October 2018

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Beige Book Report: Chicago

October 24, 2018

Summary of Economic Activity
Growth in economic activity in the Seventh District slowed to a modest pace in late August and September, and contacts expected it to continue at that pace over the next 6 to 12 months. Manufacturing production and employment grew moderately, consumer and business spending increased modestly, and construction and real estate activity was flat. Wages and prices rose modestly and financial conditions were little changed. Greater-than-usual precipitation slowed the agricultural harvest and reduced the quantity and quality of crops.

Employment and Wages
Employment growth continued at a moderate pace over the reporting period, though contacts expected gains to slow to a modest rate over the next 6 to 12 months. Hiring was focused on production, sales, and professional and technical workers. As they have for some time, contacts indicated that the labor market was tight and that they had difficulty filling positions at all skill levels. Residential and commercial construction contacts said that a lack of workers was slowing the completion of projects: One contact reported a delay of 6 weeks because they couldn't find an elevator installer. Most contacts indicated that increased US and foreign tariffs had not affected their employment levels. Wage growth remained modest overall, with wage increases most likely for managerial, professional and technical, and administrative workers. In addition, numerous manufacturing contacts reported raising wages for entry-level production workers. Many firms reported rising benefits costs, though the number of firms reporting such increases declined from the previous reporting period.

Prices rose modestly in late August and September, and contacts expected prices to continue to increase at that rate over the next 6 to 12 months. Retail prices increased slightly overall, though prices of groceries were flat. Retail contacts across numerous sectors indicated that they expected consumers to see the impact of US tariffs on imports by early 2019. Producer prices again rose moderately, reflecting in part the pass-through of higher labor, materials, energy, and freight costs.

Consumer Spending
Consumer spending increased modestly over the reporting period. Nonauto retail sales rose moderately, with gains in the furniture, appliances, hardware, electronics, apparel, hardware, lawn and garden, and hobby sectors, and slight declines in the grocery and jewelry sectors. Contacts in western Michigan reported rising hotel occupancy rates and airport traffic. Overall, respondents were pleased with back-to-school sales and expected good holiday season results as well. The rates of both new and used vehicles sales were unchanged on balance. Leasing activity slowed some.

Business Spending
Business spending increased modestly in late August and September. Retail contacts indicated that inventories were generally at comfortable levels. One contact noted that retailers were expecting good holiday sales and were building up inventories accordingly. Most manufacturing contacts also said stocks were at comfortable levels, though some indicated that inventories were too low as a result of longer lead times for materials. In addition, stocks at steel service centers remained well 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. Most contacts indicated that higher US and foreign tariffs had not affected their capital spending schedules; among those who had reacted to tariffs, more said that they were slowing spending than increasing it. In addition, some contacts indicated that they were delaying capital spending decisions until the outcomes of trade negotiations were more clear. Demand for energy from commercial and industrial users increased modestly, with growth led by the manufacturing sector. Demand for transportation services remained at a strong level.

Construction and Real Estate
Construction and real estate activity was little changed on balance over the reporting period. Residential construction was flat, with growth in suburban single-family homebuilding offset by declines in other markets. Homebuilders reported that rising labor and materials costs continued to slow activity. Home sales declined slightly on balance. Contacts indicated that low inventories of starter homes continued to hold back sales, and there were some concerns that rising interest rates were also putting a damper on demand. Home prices and residential rents increased slightly. Nonresidential construction ticked higher, with contacts highlighting growth in the office-building sector. Nonresidential construction contacts also reported that rising labor and materials costs were slowing growth. Commercial real estate activity increased slightly on top of an already strong level, with reports of increased demand for for-sale industrial properties. Commercial rents ticked higher, and vacancy rates and the availability of sublease space edged lower.

Manufacturing production increased at a moderate rate in late August and September. Steel output increased moderately, led by strong growth in demand from the energy sector. Steel imports continued to decline. Demand for heavy machinery rose moderately, with growth coming from the construction and energy sectors. Demand for heavy trucks increased slightly from an already strong level. Overall, order books for specialty metals manufacturers increased modestly; growth was spread across a wide variety of sectors, but was particularly strong from the oil and gas sector. Manufacturers of construction materials continued to report slow but steady increases in shipments. Auto production was flat, but remained at a solid level.

Banking and Finance
Financial conditions were little changed over the reporting period, which was prior to the recent increase in volatility in the stock market. Financial market participants reported steady securities prices and volatility. Business loan demand was flat overall, though contacts reported higher demand from the manufacturing, healthcare, and warehousing sectors. Competition was particularly strong for small business loans. Loan quality and lending standards were little changed. Consumer loan demand was flat overall, though contacts reported a slight increase in demand for mortgage loans. Loan quality and lending standards edged up.

Greater-than-usual precipitation slowed the harvest and reduced the quantity and quality of crops, and expectations for net crop income fell accordingly. While expectations for yields were lower than in the prior reporting period, it was still likely that they would reach record levels. Contacts reported a notable drop in Chinese purchases of US soybeans following an increase in Chinese tariffs. Farmers also faced higher transportation costs due to rail issues, a shortage of truck drivers, and complications in shifting export destinations away from China. Contacts expected the record yields and weak export demand to push crop storage to abnormally high levels. Hog and dairy prices recovered some, boosted in part by US government purchases that were part of a program to compensate farmers for losses from higher foreign tariffs. Even so, dairy farmers continued to struggle. In addition, contacts viewed gains from the new US-Mexico-Canada Agreement as too small and too far in the future to help dairy farmers. Moreover, Canada and Mexico maintained their tariffs on agricultural goods (including pork and dairy) that they imposed in response to US steel and aluminum tariffs.

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