Beige Book Report: Chicago
April 17, 2019
Summary of Economic Activity
Economic activity in the Seventh District increased slightly on balance in late February and March, though contact expected growth to pick up to a modest pace over the next 6 to 12 months. Employment increased modestly; business spending and construction and real estate increased slightly; and consumer spending and manufacturing were little changed on balance. Wages and prices rose modestly, and financial conditions improved slightly. Farmers continued to be challenged by low crop prices.
Employment and Wages
Employment increased modestly 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, sales, and production workers, though there was a noticeable decline in the number of contacts hiring production 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. Contacts reported higher job turnover, particularly for lower-skilled workers, and an increased willingness to hire and keep workers who had failed drug tests. Many manufacturing contacts said that difficulty in finding labor was the primary factor preventing them from increasing output. Wage growth remained modest overall. Contacts were most likely to report wage increases for professional and technical, administrative, and production workers. Many firms reported growing benefits costs.
Prices
Prices rose modestly in late February and March, and contacts expected prices to continue to rise at that rate over the next 6 to 12 months. Retail prices increased modestly. Producer prices also rose modestly, reflecting in part the pass-through of higher labor, materials, and freight costs.
Consumer Spending
Consumer spending was little changed over the reporting period. Nonauto retail sales were flat on balance, with strength in the hardware, general merchandise, and personal services segments offset by weakness in the jewelry, lawn and garden, building materials, furniture, and apparel sectors. Contacts noted that e-commerce continued to grow at the expense of brick and mortar stores. Light vehicle sales were little changed overall, with contacts indicating that higher used car sales balanced out lower new car sales. Many noted that new car incentives were less generous than during the previous reporting period.
Business Spending
Business spending increased slightly in late February and March. Retail contacts said that inventories were generally at comfortable levels, though one auto dealer reported elevated new vehicle inventories. Most manufacturers indicated that stocks were at comfortable levels. A heavy machinery dealer said that long lead times over the last couple of years had led them to build inventories more than usual in anticipation of the spring buying season. Capital spending moved up only a little, though contacts expected 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 increased slightly on balance over the reporting period. Residential construction increased slightly, with contacts indicating that labor and material cost pressures continued to hold back growth. Residential real estate activity increased modestly, as increased sales of homes under $300,000 offset declines in sales of homes over $1 million. Contacts indicated that lower mortgage rates and an increase in inventories had spurred sales, though inventories remained below historical norms. Nonresidential construction increased slightly on top of a strong level, and contacts in some parts of the District reported rising backlogs. Commercial real estate activity was little changed. Rents and the availability of sublease space were flat, though vacancies edged up.
Manufacturing
Manufacturing production was little changed overall in late February and March, though contacts were generally pleased with the level of activity. Demand for steel was flat, with growth in the energy and heavy machinery sectors offset by declines elsewhere. Auto production was unchanged as well, but remained at a solid level. Specialty metals manufacturers reported little change in order books overall, as increased demand from the energy and defense sectors was balanced by decreased demand from the auto industry. Heavy machinery demand increased moderately, led by increased sales to the commercial construction sector; growth in commercial construction also led to a small increase in shipments by manufacturers of construction materials.
Banking and Finance
Financial conditions improved slightly over the reporting period. Market participants noted steady growth in equities prices and relatively low volatility, but expressed concerns about the slope of the yield curve. Business loan demand increased slightly, led by stronger demand from logistics companies. Loan quality was little changed, though one contact noted deteriorating quality among agricultural loans. Consumer loan demand was flat on balance, with reports of increased mortgage activity but decreases in auto and home equity lending. Loan standards and quality were little changed.
Agriculture
Farmers continued to be challenged by low corn and soybean prices. Flooding--primarily in the far western parts of the District--destroyed some farmers’ stored crops and was likely to delay fieldwork. Contacts said they were hopeful for a resolution to trade disputes with China and a subsequent pickup in exports. Expectations of a future price rally led many farmers to continue to hold on to crops from last year’s harvest and to delay entering into contracts for this year’s harvest. Contacts expected particularly low soybean prices to push the corn-soybean mix closer to its typical 50-50 split following an increase in soybean acres last year. Livestock prices, especially for hogs, moved up in response to China’s decision to include livestock purchases in the trade negotiations and because of a considerable decline in China’s hog herd due to disease.
For more information about District economic conditions visit: chicagofed.org/cfsbc