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Chicago: December 2020

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Beige Book Report: Chicago

December 2, 2020

Summary of Economic Activity
Economic activity in the Seventh District increased moderately in October and early November, though activity remained below its pre-pandemic level. Contacts expected further growth in the coming months, but nearly all expected full recovery would not occur until at least the second half of 2021. Employment, consumer spending, and manufacturing increased moderately; business spending increased modestly; and construction and real estate was flat. Wages rose slightly, as did prices. Financial conditions improved modestly. Strong harvests, government support, and higher prices boosted expectations for farm income.

Employment and Wages
Employment increased moderately overall during the reporting period. Several contacts made little or no change to their staffing levels and there were some reports of increased headcounts in response to sales growth. Numerous contacts reported increased absenteeism because of Covid-19 cases or exposures among their workers, but these firms were generally able to maintain their output levels. Many contacts noted difficulty in finding workers, especially at the entry level. Several contacts reported using overtime to make up for elevated absenteeism and unfilled positions. Wages across skill levels and benefits costs moved up slightly.

Prices increased slightly in October and early November, and contacts expected a moderate increase in prices over the next 12 months. Consumer prices ticked up, led by higher food and vehicle prices. Producer prices increased slightly. Input costs were up modestly, driven by rising raw materials and shipping prices. Several contacts said that a shift forward in holiday season deliveries had pushed up shipping rates. Energy prices moved down further, as oil and gas inventories remained elevated and demand was slow.

Consumer Spending
Consumer spending grew moderately over the reporting period. Nonauto retail sales increased modestly. Demand remained robust in the appliance, electronics, home accessories, home improvement, power sports, and recreational goods categories. Apparel rebounded somewhat, and sales at party supply stores were strong. Growth in e-commerce eased but continued to register sharp gains from a year earlier. Contacts expected holiday-related spending to increase slightly compared with last year. Light vehicle sales decreased modestly. Auto service department activity slowed, and contacts attributed the pullback to fewer people traveling to school and work. Leisure and hospitality spending increased but remained weak, as new and existing restrictions on business travel and conventions held back gains. Contacts said that spending for elective health care procedures fell. Social service organizations reported strong demand for mental health services and financial assistance.

Business Spending
Business spending increased modestly in October and early November. Retail inventories were generally comfortable, though stocks of certain vehicle models remained well below normal levels. Most manufacturers also reported comfortable inventory levels, but a number continued to experience minor supply chain problems, especially related to raw materials. Capital expenditures were little changed overall, though a number of contacts said they had resumed making investments after pausing since the start of the pandemic. Several firms cited increased efficiencies as their justification for current expenditures. Contacts expected a moderate increase in capital spending over the next twelve months. Freight and shipping demand increased moderately, and contacts noted that capacity constraints had led to sizeable price increases. Commercial and industrial energy consumption increased slightly.

Construction and Real Estate
Construction and real estate activity was unchanged on balance over the reporting period. Residential construction increased moderately. Contacts noted that a lack of available lots and high materials costs continued to restrain growth. Residential real estate activity remained vibrant, particularly in the single-family market. Home prices rose slightly, while rents rose marginally. Nonresidential construction decreased some. Commercial real estate activity fell modestly, as did prices and rents. Contacts reported an increase in requests for shorter leases. Sublease space increased modestly as some tenants, particularly in the office sector, reduced their footprint in response to increased teleworking.

Manufacturing production increased moderately in October and early November but remained below where it was before the pandemic began. Auto output continued to rebound and was near its pre-pandemic level. Steel production increased moderately, with reports of greater demand from the construction, auto, and appliance industries. Sales of specialty metals were mixed. Demand for heavy machinery rose slightly, driven by the automotive and construction sectors. Demand for heavy trucks increased strongly, helped by higher carrier profits. Manufacturers of building materials reported a small increase in shipments, supported by growth in residential construction.

Banking and Finance
Financial conditions improved modestly over the reporting period. Participants in the equity and bond markets reported a small improvement in conditions, though volatility remained elevated in light of the pandemic and election. Business loan demand increased modestly, with contacts highlighting increases in small business banking. Contacts also reported an increase in requests for equipment financing. Business loan quality deteriorated slightly, with declines concentrated in the hospitality, retail, and commercial real estate sectors. Business loan standards tightened modestly. In consumer markets, loan demand increased somewhat, led by growth in residential mortgages. Contacts reported that delinquencies had slightly increased as accounts exited deferral programs but remained at low levels. Loan quality decreased slightly, while loan standards tightened modestly. Contacts continued to report high levels of deposits for both businesses and households.

Farm income beat expectations for the growing season, as prices for key agricultural commodities moved higher and government support continued. Corn, soybean, and wheat prices were up again, reflecting tighter stocks and increased exports. With the harvest nearly over, most of the District saw above-trend corn and soybean yields. Most specialty crops had solid yields as well. Favorable weather conditions allowed farmers to complete field work that had been skipped in prior years because of poor weather. Dairy prices were mixed, but up on net. Hog and cattle producers also benefited from higher overall prices, but expressed concern about rising feed costs.

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