Beige Book Report: Chicago
April 15, 2020
Summary of Economic Activity
Economic activity in the Seventh District declined in late February and March, as the spread of the coronavirus caused major economic upheaval. The intensity of the decline varied by industry, but contacts across industries expected a large decrease in activity over the next 3 months and expected the recovery to still be underway a year from now. Consumer spending decreased sharply; business spending, construction and real estate activity, and manufacturing production decreased moderately. Retail and hospitality payrolls plunged, though employment for most contacts was little changed. Wages edged up and prices were little changed. Financial conditions deteriorated substantially, as did prospects for agricultural income.
Employment and Wages
Many retail and hospitality contacts reported large layoffs, though employment for most Beige Book contacts was little changed over the reporting period. That said, contacts reported major changes in work environments. Manufacturers facing slowdowns often reported cutting workers' hours, and many also planned to use the downtime to carry out maintenance or do productivity enhancing projects. There also were widespread reports of workers choosing to stay home for health safety reasons. Most nonessential workers who could began telecommuting. Overall, contacts expected a modest decline in employment over the next 3 months, with few looking to increase employment until the uncertainty created by the coronavirus abated some. Among those still looking for workers, challenges in filling positions persisted at all skill levels. Wages edged up, and contacts expected modest increases over the next 12 months. Benefit costs increased slightly.
Prices
Prices were little changed in late February and March, though contacts expected modest price increases over the next 12 months. Both retail and producer prices were flat overall. Input prices were largely unchanged, except for energy prices, which fell some.
Consumer Spending
Consumer spending decreased sharply over the reporting period. Overall, nonauto retail sales declined considerably as the coronavirus crisis forced store closures across the District. Sales fell in most segments, particularly in apparel. In contrast, grocery and health and personal care stores saw dramatically higher demand, with numerous reports of runs on items such as household cleaners and toilet paper. E-commerce also expanded significantly. Consumption of services fell precipitously, particularly in the hospitality, entertainment, and food service sectors as the coronavirus crisis led to reduced travel and prohibitions of large gatherings. Vehicle sales fell sharply and dealerships across the District closed. Vehicle service center activity also fell steeply.
Business Spending
Business spending decreased modestly in late February and March. Retail inventories were generally above comfortable levels after sales in most segments fell. There were, however, reports of extremely low inventories of some grocery and household products. Most manufacturers said that inventories were at comfortable levels. Capital spending declined some, and contacts expected spending to decrease slightly over the next 12 months. Outlays were primarily for IT equipment and intellectual property, with numerous reports of spending to support telecommuting. Contacts also noted increased spending on sanitation and other protective health measures for workers. Demand for transportation services decreased slightly overall, as lower long distance volumes outweighed increases in local delivery services. Commercial and industrial energy consumption declined some, with lower usage reported from retail stores, restaurants, hotels, and auto manufacturers.
Construction and Real Estate
Construction and real estate activity decreased moderately over the reporting period. Residential construction activity fell modestly. Contacts indicated that only a small share of projects had been delayed, though they expected a large decrease in building when active projects are completed. Residential real estate activity decreased substantially. Showings were limited because widespread shelter-in-place orders meant homes could not be viewed publicly. One contact said that only sales that were under contract before the beginning of the coronavirus crisis were being completed. Nonresidential construction activity was little changed. Contacts indicated that, as with residential construction, most projects were continuing. A contact in southern Wisconsin reported greater demand from restaurants for remodeling work as owners anticipated eventually reopening. Commercial real estate activity decreased significantly, particularly for retail and office spaces. Contacts noted that there was strong pressure on landlords to give rent forbearance, but that landlords were having difficulty obtaining forbearance from their lenders. Contacts also noted that the commercial property purchase process had slowed because permits and titles were taking longer to obtain with government workers telecommuting.
Manufacturing
Manufacturing production decreased moderately on net in late February and March. Auto production declined substantially as the coronavirus crisis led many assemblers and suppliers to shut down. Steel production slowed significantly, driven by large declines in autos, oil and gas, and construction. Demand for specialty metals decreased moderately, as reduced orders from autos and aerospace outweighed slight increases from the medical and defense industries. Orders for heavy trucks continued to decline from a peak at the end of last year. Food manufacturers reported a substantial increase in demand, as did manufacturers of shipping materials. Manufacturers of building materials saw a slight increase in shipments as greater demand from commercial builders more than made up for less demand from residential builders.
Banking and Finance
Financial conditions deteriorated substantially over the reporting period. Participants in the equity and bond markets reported large increases in volatility and large decreases in liquidity across a wide range of asset categories. Business loan volumes decreased moderately as greater uncertainty led borrowers to hold off on new loan requests. That said, many businesses drew on existing lines of credit. Lenders also reported a large number of requests for loan payment deferrals. Lenders indicated that they were actively working to implement the Small Business Administration's Paycheck Protection Program and expected a large volume of applications. Business loan quality deteriorated moderately across most sectors, but especially in the hospitality, retail, and non-profit sectors. Standards tightened some. Consumer loan demand decreased moderately due to a large pullback in requests for auto and home-purchase loans. Contacts noted that consumers were carrying higher credit card balances even though new spending was lower. Mortgage refinancing volumes continued to increase. Reports on consumer loan quality were mixed: most contacts saw no change to date, but others experienced a deterioration in line with rising unemployment. Consumer loan standards tightened modestly on balance.
Agriculture
Income prospects for the agricultural sector deteriorated substantially as the spread of the coronavirus led to a dramatic fall in many commodity prices. A large drop in ethanol prices led ethanol plants to cut production and corn consumption, which pushed corn prices lower. The drop in ethanol production also reduced the availability of corn byproducts needed for nutritional balance in corn-based animal food rations. This led livestock operations to switch to soymeal and helped support soybean prices. In spite of shortages of some meat products in stores, most livestock prices fell as demand from restaurants and other food service providers weakened. Milk sales declined substantially as schools closed, but egg prices spiked. Contacts expressed concern about the health and availability of agriculture workers, particularly for specialty crop production. Access to credit for farm operators was little changed, though loan requests increased.
For more information about District economic conditions visit: chicagofed.org/cfsbc