Beige Book Report: Chicago
May 27, 2020
Summary of Economic Activity
Economic activity in the Seventh District declined sharply in April and early May, as the spread of the coronavirus caused major economic upheaval. Contacts were split over whether activity would decline further or pick up during the next 3 months, and they largely expected full recovery to take more than a year. Employment, consumer spending, business spending, construction and real estate, manufacturing, and agriculture all decreased substantially. Wages edged up and prices were little changed. Financial conditions improved modestly.
Employment and Wages
Total employment fell dramatically over the reporting period, with especially large declines in the retail, leisure and hospitality, and auto industries. That said, many contacts reported little change in employment, and a staffing firm that primarily serves manufacturers said that workers were beginning to return from furloughs. Many contacts who received a Paycheck Protection Plan (PPP) loan said that they were avoiding layoffs in order to qualify for the loan forgiveness provision of the program. Still, a number of other contacts reported challenges in meeting the PPP loan forgiveness requirement, with some saying that generous unemployment benefits were making it difficult to bring payrolls back to necessary levels. Contacts again indicated they were making major changes in work environments to protect employees against the coronavirus. Wages edged up overall, with reports of workers at many essential businesses receiving bonuses or raises. Benefit costs were flat.
Prices
Prices were little changed in April and early May, though contacts expected modest price increases over the next 12 months. Both retail and producer prices were flat overall, though grocery prices rose moderately and hotel room rates declined substantially. Input prices were largely unchanged, with the exception of shipping costs, which increased some.
Consumer Spending
Consumer spending again decreased sharply over the reporting period. Nonauto retail sales declined considerably, as sellers of non-essential goods remained closed in much of the District. Sales fell for almost all categories, with apparel, electronics, and furniture stores particularly hard hit. In contrast, grocery stores reported sizeable increases in sales, and demand for home improvement items was steady. E-commerce again saw very large gains. Light vehicle sales were much lower, as some dealerships remained closed. Sales picked up at dealerships that were open, though the pace remained well below that of a year ago. Consumption of services remained much lower than prior to the coronavirus crisis.
Contacts in the food services, entertainment, tourism, and recreation sectors expressed deep concern about the upcoming summer season, noting that social distancing requirements were likely to put substantial limits on occupancy.
Business Spending
Business spending decreased significantly in April and early May. Retail inventories were well above comfortable levels in most segments after sales fell dramatically, and many contacts cancelled the bulk of their orders for the short term.
There were, however, reports of low inventories of groceries, household products, and home improvement products. A number of manufacturers said that inventories were higher than desired. Capital expenditures declined, and many contacts said they were suspending capital spending for the remainder of the year. Contacts continued to spend to support telecommuting. Demand for transportation services decreased moderately overall, as lower long-haul volumes outweighed increases in local delivery services. Commercial and industrial energy consumption declined moderately, with lower usage by retail stores, restaurants, and the auto industry.
Construction and Real Estate
Construction and real estate activity decreased substantially over the reporting period. Residential construction decreased moderately—most projects that started before the coronavirus outbreak continued, but few new projects were started.
Residential construction in Michigan restarted in early May after being suspended in late March, but contacts were concerned about the availability of labor, in part because many workers had left the state during the suspension. Residential real estate activity decreased substantially. One contact noted heightened interest in moving out of urban areas. Home prices fell slightly, as inventories and the number of interested buyers both fell. Apartment owners reported fewer rent delinquencies than they had expected and believed generous unemployment benefits were helping. Nonresidential construction activity decreased moderately as most existing projects continued. Commercial real estate activity decreased significantly, with the largest drops in the retail and hospitality sectors. Prices were little changed, though contacts reported elevated uncertainty over how to price many properties. Rents fell modestly as vacancies and the availability of sublease space increased modestly.
Manufacturing
Manufacturing production decreased substantially in April and early May. Auto production was very low as many assemblers and suppliers remained shut down. While many automakers in the US planned to resume production in the middle of
May, there was concern over supply chains due to uncertainty about when factories in Mexico would reopen. Steel production declined precipitously, driven by large declines in autos and oil and gas. 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 their peak last year. Manufacturers of building materials saw a modest decrease in shipments, while manufacturers of packaging materials reported a large increase in demand.
Banking and Finance
Financial conditions were mixed but improved modestly on balance. Participants in the equity and bond markets reported large gains over the previous reporting period, though volatility remained elevated. Business loan volumes increased dramatically as banks processed a massive number of Paycheck Protection Program applications. Demand for other loan products decreased moderately. Quality deteriorated moderately overall, and contacts highlighted declines for the leisure, hospitality, dental, non-profit, agriculture, and energy sectors. Standards again tightened moderately. Consumer loan demand decreased moderately overall. Volumes were lower for most categories, but remained high for mortgage refinancing. One contact said that auto loan applications were up a good deal from March, though still well below normal levels. Loan quality again deteriorated slightly and standards tightened slightly.
Agriculture
Agriculture incomes fell over the reporting period as most commodity prices fell. Contacts reported disruptions in the supply chain for meats, dairy, and vegetables. The disruptions were particularly notable for meats, as coronavirus outbreaks forced a number of packing plants to suspend operations. Some packers restarted, but output was substantially lower than a year ago. With no place to deliver market-ready animals, farmers were forced to slow herd growth (including by euthanizing hogs). On net, the supply disruptions led to higher prices and shortages of meat at grocery stores and restaurants, but lower prices for cattle and hogs. Milk prices also fell, with some producers dumping milk. Some ethanol plants accepted corn deliveries again, but corn prices remained low. Soybean prices also fell, but were favorable relative to corn, resulting in some shift toward planting beans. Planting progress was ahead of last year. Late freezes damaged some crops, particularly fruit trees. Farmers anticipated government programs would help during the downturn, but observers expected some distressed farms to be forced to liquidate.
For more information about District economic conditions visit: chicagofed.org/cfsbc