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Chicago: June 2019

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Beige Book Report: Chicago

June 5, 2019

Summary of Economic Activity
Economic activity in the Seventh District increased slightly on balance in April and early May, though contacts expected growth to pick up to a modest pace over the next 12 months. Employment increased modestly; consumer spending, business spending, and construction and real estate increased slightly; and manufacturing was little changed. Wages and prices rose modestly, and lending picked up slightly. Farmers continued to be challenged by poor weather and low crop prices.

Employment and Wages
Employment increased modestly over the reporting period and contacts expected a similar-sized increase over the next 12 months. Hiring continued to be focused on professional and technical, sales, and production workers, though there was a noticeable decline in the number of contacts hiring 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. Some contacts in the construction industry indicated they are increasingly hesitant to provide quotes for projects because of difficulty in finding workers. A staffing firm reported little change in billable hours, though there was a decline in demand from the auto industry. Wage growth remained modest overall. Contacts were most likely to report wage increases for professional and technical, administrative, and production workers. There was a noticeable decline in the number of firms reporting wage increases for management occupations. Many firms reported increased benefits costs.

Prices rose modestly in April and early May, though contacts expected prices to rise at a moderate rate over the next 12 months. Retail prices increased slightly. Producer prices rose modestly, reflecting in part the pass-through of higher labor, materials, and freight costs. Numerous contacts expressed concerns about the impact on input costs of higher tariffs on Chinese imports.

Consumer Spending
Consumer spending increased slightly over the reporting period. Nonauto retail sales increased modestly, with strength in the lawn and garden and restaurant segments offset by weakness in the furniture segment. One contact noted that spending growth continues to be strongest for discount retail, recreational, and entertainment establishments. Travel and tourism contacts in the Detroit area reported a slight increase in activity. Overall, light vehicle sales were flat, with lower new vehicle sales offset by higher volumes in the used vehicle market. Contacts reported that some automakers had reduced incentives for new vehicles, particularly for leasing. Many dealers said that 2019 year-to-date sales of new vehicles were lower than expected.

Business Spending
Business spending increased slightly in April and early May. Retail inventories were generally at comfortable levels, though some contacts reported elevated inventories due to lower-than-expected seasonal sales. There also were some reports of inventory building in anticipation of increased tariffs on Chinese imports. Manufacturing inventories were at comfortable levels overall, though one auto industry supplier indicated that stocks were elevated because some customers had delayed taking delivery of their orders. Capital spending moved up only a little, though contacts expected a larger pickup in spending over the next 12 months. Outlays were primarily for replacing industrial and IT equipment and for renovating structures. Demand for transportation services was flat, but remained at a strong level.

Construction and Real Estate
Construction and real estate activity increased slightly over the reporting period, and contacts characterized the market with terms such as "plowing ahead" or "solid." Residential construction contacts reported a moderate increase in building, led by entry-level homes and mixed-use developments. Home sales edged up, as increased activity in the low- and moderately-priced segments outweighed decreased sales of high-priced homes. Prices and rents increased slightly. Nonresidential construction edged higher, with growth in the office sector offset by declines in the industrial sector. Contacts reported that high labor and materials costs were holding back growth. Commercial real estate activity also edged up. One contact in Chicago noted increased demand for large industrial buildings. Rents, vacancies, and the availability of sublease space were little changed.

Manufacturing production was little changed in April and early May. Demand for steel was flat, with little change across major sectors. Demand for heavy trucks was flat, though activity continued at a strong level. Auto production was unchanged as well, but also remained at a solid level. Specialty metals manufacturers reported little change in demand, as a pickup in demand from the aerospace and defense sectors was offset by less demand from the auto industry. Order books for heavy machinery manufacturers decreased slightly, with reports of lower demand from the agriculture sector. Manufacturers of building materials reported little change in demand overall, though a contact in Iowa reported a decline due to weather-related delays in construction projects.

Banking and Finance
Lending picked up slightly over the reporting period, while there was little change in credit quality. Business loan demand rose slightly, with growth reported in the medical, professional services, and real estate sectors. Loan quality and standards were little changed. Consumer loan demand increased slightly, primarily because of increased mortgage refinance volumes, which contacts attributed to lower interest rates. Consumer loan quality and standard were little changed. Financial market participants noted increased volatility and generally attributed it to investor concerns about the outcome of international trade negotiations.

Wet weather and low prices continued to be challenges for farmers in April and early May. There were reports of planting delays throughout the District because fields were too wet. Contacts indicated that it would soon be too late to plant corn in some areas and that switching to soybeans, while possible, would be costly due to wasted fertilizer and the low price of soybeans. Contacts also noted that the poor field conditions were adding to some farmers' financial distress. In other market segments, hog and dairy prices were up, while cattle prices were down. Hay prices moved higher as the slow development of pastures this spring meant livestock required supplemental feeding. Contacts believed that the removal of Mexican and Canadian tariffs on US livestock would boost exports.

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