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Chicago: July 2020

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Beige Book Report: Chicago

July 15, 2020

Summary of Economic Activity
Economic activity in the Seventh District increased strongly in late May and June, but remained well below its pre-pandemic level. Contacts expected further growth in activity in the coming months, but most did not expect a full recovery until at least the second half of 2021. Employment, consumer spending, and manufacturing increased substantially, while business spending and construction and real estate activity increased modestly. Wages edged up, prices declined slightly, and financial conditions deteriorated modestly. The pandemic continued to weigh on agriculture incomes.

Employment and Wages
Employment increased substantially from a very low level over the reporting period, with gains spread widely across industries. Many contacts who received a Paycheck Protection Program (PPP) loan continued to indicate that the program was helping them avoid layoffs. A number of contacts said that their ability to retain workers after the PPP money ran out depended heavily on future demand. Manufacturers facing slowdowns reported further use of downtime to carry out maintenance or do productivity enhancing projects. Some auto dealers reported selling a large number of vehicles while employing far fewer workers. Several contacts again commented that generous unemployment benefits were making it difficult to bring payrolls back to desired levels. Wages edged up across skill levels. Benefits costs also ticked up.

Prices declined slightly overall in late May and June, though contacts expected modest increases over the next 12 months. Retail prices decreased modestly on balance. There were noticeable declines for apparel, but food and beverage prices rose, particularly for beef. Producer prices edged down. Input prices were largely unchanged, with the exception of shipping costs, which increased modestly.

Consumer Spending
Consumer spending increased substantially as many establishments were permitted to reopen. The rebound generally exceeded contacts' expectations. Nonauto retailers saw gains in all sectors. Contacts noted that the home improvement, home furnishings, food and beverage, and sporting goods sectors continued to be strong. Apparel was selling, but only with very generous promotions. Vehicle sales moved up sharply, and dealerships' service departments continued to work through backlogs that had built up while stay-at-home orders were in place. Contacts reported large increases in boat and RV sales. Most contacts in the leisure and hospitality sector were open, but sales remained well below pre-coronavirus levels. For example, casinos in Iowa were allowed to reopen at 50 percent capacity, a level that reportedly matched demand. In contrast, movie theaters in most of Michigan were required to stay closed. Contacts expressed great uncertainty about the path of consumer spending over the rest of the year, especially for the holiday season.

Business Spending
Business spending increased modestly in late May and June. Retail inventories were generally above desired levels, particularly for apparel, though there were reports of low inventories of light trucks, boats, and RVs. A number of manufacturers said that inventories were higher than desired. Capital expenditures increased slightly, but many contacts continued to say they had pulled back on spending plans for the year. Contacts again indicated they were making major changes in work environments to protect employees against the coronavirus, but noted cost offsets from lower travel and entertainment spending. Freight transportation increased modestly, but remained at a low level. Commercial and industrial energy consumption increased moderately, with the largest growth in manufacturing.

Construction and Real Estate
Construction and real estate activity increased modestly on balance over the reporting period, but remained subdued. Residential construction decreased slightly. One contact reported a pullback in speculative single-family construction. Residential real estate activity increased moderately from a very low level, with gains concentrated in the starter home segment. Contacts continued to report that low inventories were supporting prices. Nonresidential construction decreased slightly on net, with much of the activity representing work on projects in progress before the pandemic. Commercial real estate activity was little changed and the market remains highly distressed. Industrial properties had the highest percentage of on time rent payments, while many tenants in the retail, restaurant, and hospitality sectors had asked for forbearance through at least the end of the summer. Retail and restaurant store closures were reportedly accelerating. Rents moved down, while vacancies and sublease space increased.

Manufacturing production increased strongly in late May and June, but remained well below where it was before the pandemic began. Auto production increased very sharply from a very low level as both assemblers and suppliers reopened. However, some contacts in the industry were concerned that the rising number of COVID-19 cases in parts of the US could result in new plant shutdowns. Steel production increased moderately, led by increased demand from the auto and oil and gas industries. Demand for heavy machinery picked up, but remained weak. Orders from specialty metals manufacturers increased moderately on balance, with reports of steady demand from the defense sector and increases from the medical and food manufacturing sectors. Manufacturers of building materials reported a moderate increase in shipments.

Banking and Finance
Financial conditions deteriorated modestly during the reporting period. Participants in the equity and bond markets reported little change in prices on net, but volatility remained elevated. Business loan demand decreased moderately as activity related to the PPP slowed. Many contacts reported large increases in businesses' cash deposits. Contacts said there was some interest in the Federal Reserve's Main Street Lending Program, but that many businesses had access to cheaper credit elsewhere. Business loan quality deteriorated moderately, particularly in the leisure and hospitality, commercial real estate, and health care sectors. Contacts noted that deferrals and the PPP had helped prevent delinquencies for many clients. One contact said that most clients appeared to have sufficient liquidity to make it into the fall. Business loan standards again tightened moderately. Consumer loan demand decreased modestly, though demand for mortgage refinancing remained strong. Loan quality again deteriorated slightly. Contacts noted that delinquencies were limited because they were granting deferrals. One contact said that roughly half of their deferrals had been to households that may struggle to resume loan payments once the current 60 to 90 day deferral period was over. Consumer loan standards tightened modestly.

The COVID-19 pandemic continued to weigh on agriculture incomes. That said, farm incomes received a boost from some commodity price increases and CARES Act payments. Corn and soybean prices moved up after a USDA report that the number of corn acres planted was smaller than expected. Following a smooth planting season, corn and soybean crops were off to an excellent start. Specialty crops were also in decent shape. Meat production rebounded to levels near that of a year ago as packing plants reopened and began running extra shifts. Nevertheless, contacts reported a large backlog of hogs to slaughter. Cattle and hog prices fell and were below year ago levels. Milk prices at the farm gate stayed below last year's levels in spite of some upward movement in dairy prices. Cheese demand surged, pushing prices to high levels. Ethanol margins widened, but some facilities remained closed and others were operating below full capacity. Demand for sites to locate renewable energy assets, recreational ground, and rural housing helped keep farmland values mostly stable.

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