Beige Book Report: Chicago
October 21, 2020
Summary of Economic Activity
Economic activity in the Seventh District increased robustly in late August and September, 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 consumer spending increased robustly; manufacturing increased moderately; construction and real estate increased modestly; and business spending increased slightly. Wages increased slightly and prices rose modestly. Financial conditions were little changed on balance. Rising prices and additional government support lifted expectations for farm income.
Employment and Wages
Employment increased robustly overall during the reporting period, though the pace of growth slowed. Furthermore, a number of contacts again reported little or no change to their staffing levels. Many retail contacts noted that they continued to operate with reduced hours and were holding staffing levels down accordingly. In spite of high unemployment, some contacts in manufacturing and agriculture reported that finding entry level workers was only a little easier than prior to the pandemic. Contacts continued to report providing scheduling accommodations to workers with young children. Wages increased slightly across skill levels, while benefits costs moved up modestly.
Prices
Prices increased modestly on balance in late August and September, and contacts expected a similar sized increase over the next 12 months. Consumer prices increased moderately, led by higher food and vehicle prices. Producer prices increased slightly. Input costs rose modestly, driven by rising prices for shipping and raw materials, particularly metals. Energy prices remained weak, as inventories of natural gas and crude oil stayed elevated and demand remained slow.
Consumer Spending
Consumer spending increased robustly over the reporting period, though overall spending remained well below pre-pandemic levels. Nonauto retail sales increased moderately, led by growth in the home improvement, home furnishings, and appliance categories. Hobby and sporting good sales remained strong. Apparel sales were lackluster because of low demand for traditional back-to-school wear. Growth in e-commerce eased but continued to register large gains from a year earlier. The pace of vehicle sales strengthened. Dealers indicated that inventories of new light trucks and many types of used vehicles continued to be tight, which supported rising prices and profit margins. Demand for auto repairs increased significantly. Contacts in the leisure and hospitality industry reported large increases in volumes, but activity remained well below its pre-pandemic level. Contacts noted that Labor Day air and hotel bookings were sharply off year-ago levels and that business travel continued to be weak. In a Michigan survey, the majority of restaurant operators believed they would not see sales return to pre-pandemic levels for at least 6 months.
Business Spending
Business spending increased slightly in late August and September. Retailers continued to struggle to maintain inventories for in-demand items such as home improvement, home furnishings, and hobby goods because of supply constraints. A contact said that appliance shortages, especially of refrigerators, hampered multi-family building projects. Most manufacturers indicated that inventories were at comfortable levels, though a number of contacts continued to report minor supply chain problems. Capital expenditures were little changed, and many contacts again said they had paused expansion plans. Demand for transportation services increased modestly, with contacts noting that capacity constraints had led to sizeable price increases. Commercial energy consumption decreased slightly, but industrial energy consumption increased slightly.
Construction and Real Estate
Construction and real estate activity increased at a modest pace over the reporting period. Residential construction grew modestly. Contacts noted that a lack of available lots, material shortages, and rising lumber and drywall prices were putting a damper on growth. Residential real estate activity remained vibrant, particularly in the single-family market. Home prices rose and inventories remained low. Nonresidential construction was flat overall and, as with residential construction, was experiencing rising costs. A Southeast Michigan contact indicated that while there was solid demand for new industrial space, there was no new office or hospitality work. Commercial real estate activity fell slightly overall, with deal making largely limited to industrial and multi-family properties. Warehouse and distribution space was in particularly high demand. Commercial real estate prices fell modestly overall. Contacts also reported falling rents for office and retail spaces.
Manufacturing
Manufacturing production increased moderately in late August and September, but remained below where it was before the pandemic began. Auto output continued to rebound and was near its pre-pandemic level. Steel production also continued to recover, but remained low. Demand for heavy machinery was higher than earlier in the year, but remained weak. Contacts noted that while demand for heavy machinery from the infrastructure segment remained solid, they were concerned about a drop-off in spending by state and local governments, many of which face potentially large budget cuts. Specialty metals manufacturers reported a modest increase in sales, with contacts highlighting growth in the construction, medical, and defense industries. Demand for heavy trucks increased moderately. Manufacturers of building materials saw a modest increase in shipments, supported by growth in residential construction. Contacts in food processing reported strong growth and plans to expand capacity.
Banking and Finance
Financial conditions were little changed on balance over the reporting period. Participants in the equity and bond markets reported little change in conditions overall, though volatility remained elevated. Business loan demand decreased modestly, with contacts highlighting declines in the hospitality and commercial real estate sectors. One contact noted that commercial and industrial loan demand had started to come back because many businesses had used up their PPP funds. Business loan quality deteriorated modestly, with declines concentrated in leisure and hospitality and commercial real estate. Contacts reported that forbearances had ended for many customers and that there were few requests for extensions. Standards again tightened some. Consumer loan demand increased modestly, led by continued mortgage refinancing activity. Loan quality improved slightly while standards tightened slightly. Contacts indicated that forbearances had ended in the consumer sector as well, with limited effects on portfolio quality. Contacts continued to report high levels of deposits for both businesses and households.
Agriculture
Rising prices for key agricultural commodities and additional government support lifted expectations for farm income for the year. Corn, soybean, and wheat prices moved higher, reflecting in part lower stocks compared with a year ago. Increases in corn and soybean exports, particularly to China, also supported prices. In addition, a dry August held back expected yields. Dairy prices were higher, supported by increased sales to food service establishments, and strong exports. Hog prices increased while cattle prices decreased. There were reports that improved income prospects had eased stress on agricultural borrowers somewhat, though concerns remained for next year, when government support was expected to drop substantially.
For more information about District economic conditions visit: chicagofed.org/cfsbc