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Chicago: January 2021

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Beige Book Report: Chicago

January 14, 2021

Summary of Economic Activity
Economic activity in the Seventh District increased modestly in late November and December but remained below its pre-pandemic level. Contacts expected further growth in the coming months, but most did not expect to see full recovery until at least the first half of 2022. Manufacturing increased moderately; business spending and construction and real estate increased modestly; and employment and consumer spending increased slightly. Wages rose modestly and prices were up slightly. Financial conditions were little changed. Agricultural income for 2020 was better than expected at the beginning of the year and at the onset of the pandemic.

Employment and Wages
Employment increased slightly over the reporting period, but contacts expected a moderate increase over the next 12 months. Contacts continued to report elevated employee absenteeism due to Covid-19 cases or exposures and childcare challenges for their workers, with some manufacturers saying they were forced to slow production following the Thanksgiving holiday due to staffing challenges. Many contacts noted difficulty in hiring workers, especially at the entry level. One aluminum producer said they were struggling to meet demand because they couldn't hire enough workers, even after raising wages. Overall, wages rose modestly across skill levels, with an increased number of reports of pay hikes for higher skilled workers. Benefits costs also rose modestly, with several contacts reporting higher healthcare costs. Some contacts said they had paid out larger-than-normal year-end bonuses, but others said they had been forced to cancel them.

Prices increased only slightly in late November and December, but contacts expected a more moderate increase in prices over the next 12 months. Consumer prices remained flat while producer prices increased some. Input costs increased modestly, driven by rising raw materials, energy, and shipping prices. Numerous manufacturing contacts noted large price increases for metals and metal products, particularly steel and aluminum. Energy prices increased some, as lower crude inventories supported higher prices for petroleum products.

Consumer Spending
Consumer spending increased slightly over the reporting period. Nonauto retail sales increased modestly as holiday sales came in at the low end of forecasts. E-commerce sales remained strong, but growth plateaued, in part because of shipping challenges. Brick-and-mortar traffic fell overall during the holiday shopping season. Demand remained robust in the home improvement, appliances, and furniture categories leading some items to be out of stock. Apparel sales increased only slightly. Light vehicle sales decreased slightly, and remained below pre-pandemic levels, with new vehicle sales softening more than sales of used vehicles. One contact said that vehicle demand from low and moderate income consumers had retreated as fiscal stimulus effects wore off. Leisure and hospitality spending weakened further as new and existing restrictions on restaurants and entertainment venues limited sales.

Business Spending
Business spending increased modestly in late November and December. Retail inventories were somewhat low overall. Dealers said that vehicle inventories remained well below pre-pandemic levels and weren't expected to rebound until well into 2021. Manufacturing inventories were generally at comfortable levels, but a growing number of contacts reported supply chain problems, especially related to raw materials, cardboard boxes, electrical components, and specialty parts. One contact said that they had stocked higher levels of raw materials to reduce the risk of running out. Capital expenditures increased modestly, as a number of contacts said they were resuming small-scale investment in equipment after pausing at the start of the pandemic. Contacts expected a moderate increase in capital spending over the next twelve months. Demand for transportation services increased moderately, and contacts noted that capacity constraints had led to sizeable price increases. There was a small increase in commercial and industrial energy consumption.

Construction and Real Estate
Construction and real estate activity increased modestly on balance over the reporting period. Residential construction activity increased moderately, with a number of contacts reporting increased single-family building. A contact in Des Moines said home construction was at its highest level in more than a decade and that the market for land was quite competitive. Contacts again reported project delays because of increased lead times for building materials and appliances, labor shortages, and delays in government permits and inspections. Residential real estate activity increased modestly. Home prices rose moderately, while rents rose slightly. Nonresidential construction was unchanged on balance. Construction of industrial space remained a bright spot, with a contact saying completed projects in 2020 in the Indianapolis area broke 2019's record. Commercial real estate activity fell slightly. Prices and rents fell marginally for commercial real estate, while sublease space increased slightly. Demand for industrial space remained robust, but interest in office and retail space decreased further.

Manufacturing production increased moderately in late November and December, with reports of activity in some sectors approaching pre-pandemic levels. Some firms with strong demand continued producing on days during the holiday weeks when they normally would have been shut down. Auto output was stable and near its pre-pandemic level. Production of steel and aluminum increased, with growing demand from the construction, auto, and appliance industries. Manufacturer sales of specialty metals increased moderately and some contacts reported that capacity constraints had pushed up delivery lead times. Demand for heavy machinery rose slightly, driven in part by growth in the agriculture sector. Demand for heavy trucks increased strongly. There was steady demand for building materials.

Banking and Finance
Financial conditions were little changed on balance over the reporting period. Participants in the equity and bond markets reported a small improvement in conditions, though volatility remained elevated. Business loan demand decreased modestly overall, with one contact highlighting commercial real estate as a source of decline. Business loan quality deteriorated slightly, with declines concentrated in the retail, entertainment, and commercial real estate sectors. Business loan standards tightened modestly. Consumer lending was little changed on balance. Contacts continued to note steady, strong demand for residential mortgages. Most contacts said that loan quality and standards were little changed, though one contact reported a slight increase in delinquencies as customers came off deferrals.

Agricultural income for 2020 was better than contacts expected at the beginning of the year and at the onset of the pandemic. Contacts viewed government payments as an important reason many farms had profits. Corn and soybean prices continued to move higher over the reporting period, spurred by strong export demand. A larger than usual number of acres were planted with winter wheat, encouraged by higher prices for wheat and good fall weather. Dairy prices were volatile over the reporting period but ended close to where they started. Cattle prices were generally up, but hog prices moved down. Farmland values increased some. Ethanol producers continued to struggle, but some were helped by growing demand for byproducts such as carbon dioxide for dry ice.

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