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Chicago: December 2018

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Beige Book Report: Chicago

December 5, 2018

Summary of Economic Activity
Economic activity in the Seventh District grew at a modest pace in October and early November, and contacts expected it to continue at that pace over the next 6 to 12 months. Manufacturing production grew moderately; employment, consumer spending, and business spending increased modestly; and construction and real estate activity decreased slightly. Wages and prices rose modestly and financial conditions were little changed. Large corn and soybean yields led to some improvements in crop producers' incomes.

Employment and Wages 
Employment growth slowed to a modest pace over the reporting period, and contacts expected job gains to continue at that rate over the next 6 to 12 months. Hiring was focused on production, sales, and professional and technical workers, though there was a decline in the number of contacts planning to hire sales 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. A number of contacts said that they had been "ghosted," a situation in which a worker stops coming to work without notice and then is impossible to contact. Wage growth picked up some but remained modest overall. More contacts reported that they were increasing wages for select employees as opposed to raising wages across the board. Contacts were most likely to report wage increases for managerial, professional and technical, administrative, and production workers. Many firms reported rising benefits costs.

Prices rose modestly in October and early November, and contacts expected prices to continue to increase at that rate over the next 6 to 12 months. Retail prices increased slightly overall. Producer prices again rose moderately, reflecting in part the pass-through of higher labor, materials, and freight costs. Energy costs declined some.

Consumer Spending
Consumer spending picked up some over the reporting period, but growth remained modest on balance. Nonauto retail sales rose modestly, with gains in the home improvement, hardware, lawn and garden, furniture and appliance, and apparel sectors. Contacts expected good holiday sales this year. Light vehicle sales rose moderately, with gains for both new and used vehicles. Some dealers indicated that generous discounts had noticeably boosted business fleet sales.

Business Spending
Business spending increased modestly in October and early November. Retail contacts said that inventories were generally at comfortable levels. One contact noted that retailers were expecting good holiday sales and had increased inventories accordingly. Contacts also indicated that retailers were building up stock in anticipation of higher tariffs on Chinese imports that are set to take effect in 2019. Most manufacturing contacts also reported stocks were at comfortable levels, though some indicated that inventories were too low because of longer lead times for materials. 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. There was also a notable increase in contacts reporting spending for M&A. Demand for energy from commercial and industrial users increased modestly, with growth in manufacturing (particularly from steel producers) offsetting a slight decline in the commercial sector. Demand for transportation services was little changed, but remained at a strong level.

Construction and Real Estate
Construction and real estate activity decreased slightly over the reporting period. Residential construction declined slightly, with growth in suburban single-family homebuilding offset by declines in other markets. Home sales also declined some. One contact attributed the slowdown to rising interest rates and low inventories for starter homes. Home prices and residential rents increased slightly. Nonresidential construction was little changed overall, though one contact noted increased demand from the education sector. Commercial real estate activity was also little changed, though the pace remained strong. Contacts noted particularly strong demand for industrial space. Commercial rents edged higher and vacancy rates edged lower. The availability of sublease space increased marginally.

Growth in manufacturing production continued at a moderate rate in October and early November. Steel output rose moderately as end-user demand remained at a high level. Steel imports continued to decline. Demand for heavy machinery increased moderately as well, with growth led by the construction and energy sectors. One contact noted that supply chain constraints were holding back growth. Demand for heavy trucks remained strong. Order books for specialty metals manufacturers increased modestly: Growth was spread across a wide variety of sectors, though contacts noted particularly strong demand from the aerospace sector. Auto production was flat, but remained at a solid level.

Banking and Finance
Overall, financial conditions were little changed over the reporting period. Financial market participants noted the declines in equities prices and increased volatility. Business loan demand increased modestly, with contacts reporting growth in the construction, manufacturing, transportation, and energy sectors. Loan quality and lending standards were little changed. Consumer loan demand was flat overall, though contacts noted a slight increase in demand for auto loans. Consumer loan quality and lending standards were also little changed.

Although the harvest took longer than normal, corn and soybean yields were quite large. And, in spite of low prices, crop producers' incomes were better than what had been expected earlier this year. However, crop sales were lower than normal, and a record amount of the harvest was put into storage. This reflected in part higher prices for delivery in later months compared to prices for delivery at harvest. Logistical challenges continued as soybeans that would usually be exported to China were being sent to other markets. Farm equipment dealers reported giving large discounts in order to make sales as many crop farmers continued to face financial challenges. Hog and cattle prices moved higher during the reporting period, but milk prices floundered in part because of weak exports. Farm mediation services remained in demand for troubled operations.

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