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Chicago: July 2019

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Beige Book Report: Chicago

July 17, 2019

Summary of Economic Activity
Economic activity in the Seventh District was little changed on balance in late May and June, though contacts expected it to grow at a modest pace over the next 12 months. Employment increased modestly; business spending increased slightly; consumer spending and construction and real estate activity were flat; and manufacturing decreased slightly. Wages and prices rose modestly and financial conditions improved modestly. More wet weather put further stress on farmers.

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. As they have for some time, contacts indicated that the labor market was tight and that it was difficult to fill positions at all skill levels. A staffing firm reported little change in billable hours. Wage growth remained modest overall. Contacts were most likely to report wage increases for professional and technical, administrative, and production workers. Many firms reported increased benefits costs.

Prices rose slightly in late May and June, though contacts expected prices to rise at a somewhat higher rate over the next 12 months. Retail prices were little changed. Producer prices rose modestly, reflecting in part higher labor, materials, and freight costs. That said, contacts noted that growth in freight prices had slowed in recent months. Contacts in the auto industry reported that automakers and suppliers were not yet passing on much of their higher costs related to tariffs.

Consumer Spending
Consumer spending was little changed over the reporting period. Nonauto retail sales were flat, with reports of increased activity in the furniture and appliance sectors and decreases in the apparel and jewelry sectors. Contacts indicated that restaurant sales increased. Total light vehicle sales were flat, with lower new vehicle sales offset by higher volumes in the used vehicle market. Dealers said that reduced incentives from manufacturers had hurt new vehicle sales; they also noted that the strength in used vehicle sales was sufficient to maintain overall profitability.

Business Spending
Business spending increased slightly in late May and June. Retail inventories were generally at comfortable levels. Manufacturing inventories were also generally at comfortable levels, but there was some increase in the number of contacts reporting higher-than-normal inventories due to slower demand. In contrast, one heavy-duty truck dealer noted a shortage of new trucks. Capital spending moved up slightly, though contacts expected a larger pickup over the next 12 months. Outlays were primarily for replacing industrial and IT equipment and for renovating structures. Contacts from a number of sectors said that elevated uncertainty about the future state of the economy and international trade policy was holding back investment. Demand for transportation services was flat, but remained at a strong level. Commercial and industrial energy demand edged down.

Construction and Real Estate
Construction and real estate activity was little changed over the reporting period. Contacts reported a downtick in residential construction. Home sales were flat overall, with increased sales of lower-end homes offset by decreased sales of higher-end homes. Home prices and rents rose slightly. Nonresidential construction increased modestly overall. One contact noted that there was a slowdown in industrial building, particularly for the auto industry, but that civil construction was still doing well. Nonresidential construction contacts again reported that high materials and labor costs were holding back growth. Commercial real estate activity was little changed, as were rents, vacancies, and the availability of sublease space.

Manufacturing production decreased slightly in late May and June; in general, however, contacts remained comfortable with the level of activity. Demand for steel declined; the drop was broad-based with the exception of the energy sector, where demand was flat. Specialty metals manufacturers reported a slight drop in demand, as lower demand from the auto and construction industries outweighed growth in the aerospace and defense sectors. Order books for heavy machinery manufacturers decreased slightly, due to lower demand from agriculture. Demand for heavy trucks and auto production both slowed some, but remained at solid levels.

Banking and Finance
Financial conditions improved modestly overall during the reporting period. Financial market participants reported some improvement in market conditions, though volatility was slightly elevated. Business loan demand rose modestly, led by growth in the construction sector. Loan quality deteriorated slightly. Standards loosened some as lenders reported strong competition for quality clients. Consumer loan demand increased modestly, with contacts noting that lower interest rates were encouraging increased mortgage activity. Consumer loan quality and loan standards were little changed.

More wet weather in late May and June caused further delays in planting and even poorer growing conditions. One contact in Indiana said, "I have been farming for 48 years now and this is the worst spring/summer planting season we have experienced." Because it is now too late to plant corn and soybeans, contacts said that many farmers would be forced to make insurance claims and plant less-profitable cover crops. Corn and soybean prices moved up as expected yields for the fall harvest declined. Egg and dairy prices increased, while hog and cattle prices decreased. Contacts noted that struggling dairy operations were slaughtering more cows, which contributed to the lower cattle prices.

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