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Chicago: March 2019

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Beige Book Report: Chicago

March 6, 2019

Summary of Economic Activity
Economic activity in the Seventh District increased slightly on balance in January and early February, though contacts expected growth to return to a modest pace over the next 6 to 12 months. Employment and business spending increased slightly; manufacturing and construction and real estate activity were little changed; and consumer spending fell modestly. Wages rose modestly, prices rose slightly, and financial conditions improved modestly. Contacts expected crop incomes to be lower in 2019 than in 2018. Only a small share of contacts indicated that the government shutdown had hurt product demand or affected business decisions.

Employment and Wages
Employment increased slightly over the reporting period and contacts expected a similar-sized increase 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 that they had difficulty filling positions at all skill levels. A staffing firm that primarily supplies manufacturers with production workers reported continued difficulty in filling orders and a small decline in billable hours. A number of manufacturing contacts noted that a slowdown in demand had reduced their reliance on overtime and lessened the urgency of filling open positions. Wage growth remained modest overall. Contacts were most likely to report wage increases for managerial, professional and technical, and production workers. Many firms reported growing benefits costs.

Prices rose slightly in January and early February, though contacts expected price increases to pick up to a modest rate over the next 6 to 12 months. Retail prices were little changed. Producer prices rose modestly, reflecting in part the pass-through of higher labor, materials, and freight costs.

Consumer Spending
Consumer spending fell modestly over the reporting period. Nonauto retail sales decreased modestly, with declines in the furniture, appliances, apparel, and home improvement sectors outweighing increases in the hardware, lawn and garden, and personal services categories. Numerous contacts attributed slower sales to the harsh winter weather that occurred over the reporting period. Light vehicle sales also fell. Dealers believed that bad weather played a role in the decline and noted some improvement in early February compared with January, though some also expressed concern about underlying weakness in demand.

Business Spending
Business spending increased slightly in January and early February. Retail contacts said that inventories were generally at comfortable levels, though some auto dealers reported elevated inventories. Most manufacturers indicated that stocks were at comfortable levels, though heavy-duty truck inventories were low. Capital spending increased slightly, with contacts expecting somewhat faster growth over the next 6 to 12 months. Outlays were primarily for replacing industrial and IT equipment and for renovating structures. Energy demand from commercial and industrial users was little changed. Demand for transportation services was flat, but remained at a strong level.

Construction and Real Estate
Construction and real estate activity was little changed over the reporting period. Residential real estate activity slowed some, held back by tight inventories for lower-priced homes and reduced demand for higher-priced homes. One contact noted that while entry-level inventories remained tight, they had risen for the first time in four years. Investor demand for multifamily properties remained strong. Home prices and rents edged higher. Nonresidential construction was unchanged on balance, though one contact noted a pickup in bidding activity. Contacts indicated that shortages of materials and workers were leading to delays in completing projects. Commercial real estate activity was also unchanged, with growth in demand for industrial space offset by declines in demand for big box retail and office space. Contacts noted that in many areas the availability of industrial space was quite limited. Rents and the overall availability of sublease space were flat. Vacancy rates edged higher.

Manufacturing production was little changed in January and early February, though contacts were generally pleased with the level of activity. Demand for steel increased, but at a slower rate than in most of 2018. Growth in heavy machinery demand was also slower than a year ago, but remained solid across major selling sectors. Heavy truck production was little changed but continued at a strong pace, and one contact noted that large backlogs suggested the level of output would be sustained through much of 2019. Specialty metals manufacturers reported slight increases in order books, highlighting growth in the medical devices, aerospace, and defense sectors. Auto production declined slightly, but remained at a solid level.

Banking and Finance
Financial conditions improved modestly over the reporting period. Market participants noted a decline in volatility and rising equities prices. Business loan demand rose slightly, led by increased lending to the manufacturing and food and beverage sectors. Loan quality was little changed, though one contact noted increased delinquencies among retailers. Loan standards were little changed. Consumer loan demand decreased slightly, primarily because of lower home loan volumes; loan quality and standards were little changed.

Prices for corn were up a bit over the reporting period, while soybean and wheat prices moved lower. Contacts expected crop incomes to be lower in 2019 compared with 2018, anticipating that prices will stay low and the harvest will be smaller than 2018’s bumper crop. They also thought low soybean prices would lead farmers to switch some fields from soybeans to corn. Contacts noted positive reports on trade talks between the U.S. and China—including news that China bought some US soybeans. Livestock prices increased overall, and harsh winter weather required extra feeding expenditures for animals.

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