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Chicago: September 2020

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Beige Book Report: Chicago

September 2, 2020

Summary of Economic Activity
Economic activity in the Seventh District again increased strongly in July and early August, but the pace of growth was slower than the prior reporting period and activity remained well below its pre-pandemic level. Contacts expected further growth in the coming months, but most did not expect a full recovery until at least the second half of 2021. Employment and manufacturing increased strongly; consumer spending and construction and real estate increased moderately; and business spending increased slightly. Wages increased slightly and prices rose modestly. Financial conditions also improved modestly. The pandemic continued to weigh on agricultural incomes.

Employment and Wages
Employment overall increased strongly during the reporting period, though a large number of contacts made little or no change to their staffing levels. One said that the Paycheck Protection Program (PPP) had allowed his firm to retain workers during the depths of the downturn and was sparing them the difficulty of searching for workers now that activity was picking up. A number of contacts in manufacturing reported they were maintaining higher employment levels than usual because of elevated rates of absenteeism as workers with a positive COVID test or potential exposure had to quarantine. Several contacts again commented that generous unemployment benefits had made it difficult to bring payrolls back to desired levels, especially at the entry level. Wages increased slightly across skill levels. Benefits costs also moved up some.

Prices rose modestly in July and early August, and contacts expected a similar-sized increase over the next 12 months. Consumer prices increased moderately on balance, led by higher vehicle prices. Food and beverage prices fell a bit overall. Producer prices increased slightly. Input costs were up modestly, driven by rising raw materials and shipping costs.

Consumer Spending
Consumer spending increased moderately over the reporting period, and sales in many sectors returned to near their pre-pandemic levels. Nonauto retail spending increased moderately. Contacts again reported robust gains in electronics (particularly for items that support e-learning) and sporting goods, but disappointing sales of apparel and other traditional back-to-school items as many schools were opting for virtual learning this fall. Sales leveled off in the grocery and home improvement sectors but remained well above year-ago levels. Vehicle sales fell slightly from strong levels in the previous reporting period. Dealers said that low inventories of some light truck models were holding back sales but supporting higher prices and profitability. Boats and RV sales continued to be strong. Contacts in the leisure and hospitality sector reported large increases in volumes, especially at hotels and restaurants, but activity remained well below its pre-pandemic level.

Business Spending
Business spending increased slightly in July and early August. Many retailers continued to struggle with inventory positions: one contact noted that nonessential retailers were being "careful on inventory" and did not want to over-order, while others reported low inventories of light trucks, boats, RVs, and many grocery items. Overall, manufacturers said inventories were somewhat higher than comfortable, and a number continued to report minor supply chain problems. Capital expenditures were little changed, and many contacts said they had paused expansion plans for the year. Freight transportation increased modestly, but remained at a low level. Commercial and industrial energy consumption increased modestly, with higher reported usage by small commercial establishments.

Construction and Real Estate
Construction and real estate activity increased moderately on balance over the reporting period. Residential construction grew modestly, with increases in single-family suburban building. In contrast, residential real estate activity increased substantially, with gains in most segments. Contacts noted that low interest rates were supporting demand. Many contacts said that demand for larger living spaces had increased since the pandemic began. Prices rose modestly, driven by low inventories of single-family homes. Nonresidential construction increased on net, but activity remained slow. One contact said that financing challenges and weak demand were making it difficult for smaller construction firms to land nonresidential jobs and that larger firms were exploring taking on smaller projects. Commercial real estate activity decreased moderately, as demand for retail and office space fell. Sublease space for those segments increased moderately. Demand for industrial space remained solid. Rents fell modestly overall. Sales of commercial properties were slow and prices fell modestly. Some contacts said they were waiting for prices to fall further before making purchases, and one contact said that the gap between what buyers were willing to pay and what sellers were willing to accept was unusually large.

Manufacturing production increased strongly in July and early August, but remained below where it was before the pandemic began. Auto production again grew sharply, though the pace of growth was slower than the previous reporting period. Steel production increased moderately, led by increased demand from the auto and construction industries. Heavy machinery manufacturers reported a slight decline in orders because of lower demand from the mining and energy sectors. Sales at specialty metals manufacturers increased modestly due to growth in demand from the auto, medical, and food manufacturing sectors. Demand for heavy trucks increased, but remained at low levels. Manufacturers of building materials reported a modest increase in shipments.

Banking and Finance
Financial conditions improved modestly on balance over the reporting period. Participants in the equity and bond markets reported better conditions, though volatility remained elevated. Business loan demand decreased moderately. Contacts noted that many businesses were flush with cash because of the Paycheck Protection Program (PPP) but were holding back on new capital purchases. Business loan quality deteriorated moderately, with declines concentrated in leisure and hospitality, retail, commercial real estate, and health care. Contacts said that payment deferrals and the PPP continued to help prevent delinquencies for many clients. Standards again tightened modestly. Consumer loan demand increased modestly, led by strong home purchase and refinancing activity. Loan quality improved slightly while standards tightened slightly. Contacts noted that deferrals were limiting delinquencies in the consumer sector as well. Contacts continued to report high levels of deposits for both businesses and households.

The agriculture sector continued to deal with lost income due to COVID-19 related factors, though CARES Act payments provided some support. In addition, a derecho windstorm caused damage to crops (especially corn), storage facilities, and livestock facilities in a number of areas within the District. Parts of the District were also experiencing drought. Still, contacts expected the corn and soybean harvests to be near record levels for the District as a whole. Corn prices were little changed at levels below where they were a year ago, while soybean prices rose and were above year-ago levels. Beef and pork production was catching up from pandemic-related reductions, and the backlog of cattle and hogs ready for slaughter fell. One contact reported that a gap in the supply of hogs was forming due to earlier euthanizations of many baby pigs. Cattle and hog prices rose, but not above year-ago prices. Beef and cheese prices moved lower as supplies normalized.

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