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Beige Book Report: Chicago
March 3, 2021
Summary of Economic Activity
Economic activity in the Seventh District increased modestly in January and early February but remained below its pre-pandemic level. Contacts expected growth to pick up in the coming months, but most did not expect to see full recovery until at least the first half of 2022. Manufacturing and consumer spending increased moderately; business spending and construction and real estate increased slightly; and employment was little changed. Wages and prices rose modestly. Financial conditions were little changed. Contacts expected agricultural income to be solid in 2021.
Employment and Wages
Overall, employment was little changed over the reporting period, though contacts expected a moderate increase over the next 12 months. Contacts reported that staffing challenges related to COVID-19 cases or exposures and childcare needs had become less severe. In addition, a staffing firm that primarily supplies manufacturers with production workers noted that reduced risk of contracting COVID-19—because of modifications to worksites, training, and falling case counts—was helping support the supply of workers. That said, many contacts continued to experience difficulty in hiring workers, especially at the entry level. One electronics manufacturer was still struggling to fill open positions despite implementing training programs and building relationships with technical schools. Several contacts expressed concern that unemployment benefits were putting a damper on worker availability. Wages across skill levels and benefits costs increased modestly.
Prices increased modestly overall in January and early February, and contacts expected a moderate increase in prices over the next 12 months. Consumer and producer prices both increased modestly. Input costs, however, increased moderately, driven by rising prices for raw materials, shipping, and energy. Numerous manufacturing contacts reported large price increases for primary metals and metal products, particularly copper and steel. Energy prices increased, with some prices spiking because of cold weather.
Consumer spending increased moderately on balance over the reporting period. Nonauto retail sales increased moderately, supported by robust demand in the home improvement, appliances, furniture, and sporting goods segments and a pickup in sales at apparel and discount stores. Contacts said that stimulus checks received as part of the federal coronavirus relief bill passed in December helped increase activity. While e-commerce continued to be strong, contacts also noted an increase in brick-and-mortar sales as the decline in COVID-19 cases made some consumers feel safer shopping in-store. Light vehicle sales were up modestly, with low inventories of many popular models leading to price increases. Demand for travel, hospitality, and other leisure-related activities remained weak.
Business spending increased slightly in January and early February. Inventory levels continued to be lean in many retail segments due to high demand. Contacts anticipated that vehicle inventories would decline even further because a shortage of microchips had slowed production, and dealers expected inventory levels to be uncomfortably low until at least the second half of the year. Manufacturing inventories were generally at comfortable levels, though several contacts reported supply chain issues related to raw materials (particularly steel and copper), microchips, and specialty parts. Capital expenditures were little changed overall. And while some said they were holding back because of uncertainty over the pandemic, contacts overall expected a moderate increase in their capital spending over the next twelve months on the anticipation that the pandemic will continue to recede. Demand for transportation services increased slightly on top of a high level. Contacts continued to report that bottlenecks in shipping, particularly at West Coast ports, were causing delayed deliveries. There was a small increase in commercial and industrial energy consumption.
Construction and Real Estate
Construction and real estate activity increased slightly on balance over the reporting period. Residential construction was flat, but the level of activity remained high. Contacts noted that difficulties in obtaining building materials, especially steel and lumber, were pushing up costs and slowing construction activity. Residential real estate activity increased slightly, with reports that tight inventories were holding back sales. Home prices and rents increased modestly on balance, though contacts in parts of the District reported that some homes were receiving multiple offers and selling for well over asking price. Nonresidential construction activity increased modestly. Contacts in southeast Michigan said there was a noticeable increase in industrial and warehouse construction in vacant areas of Detroit. Commercial real estate activity was flat. The office sector continued to struggle. Contacts indicated that some office tenants were downsizing their footprint in response to the pandemic. There were also reports of leasing deals that included long periods of free rent. Prices and rents fell slightly, and the availability of sublease space increased slightly.
Manufacturing production increased moderately in January and early February, with overall activity approaching pre-pandemic levels. Auto output slowed despite solid demand because of supply chain problems. Production of steel and aluminum increased moderately, responding to a broad increase in demand across most manufacturing subsectors. Manufacturers' sales of specialty metals increased moderately, driven by demand from the automotive, construction, and agriculture sectors. Demand for heavy machinery remained flat, while demand for heavy trucks increased moderately.
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, with declines concentrated in commercial real estate and in leisure and hospitality. That said, contacts noted that round two of the Paycheck Protection Program was supporting activity. Business loan quality edged down, with declines reported in the commercial real estate, hospitality, and retail sectors. Business loan standards tightened slightly overall. In consumer markets, loan demand decreased slightly, though residential mortgage activity remained strong. Standards for consumer loans tightened slightly and loan quality remained unchanged on balance. A contact at an organization that assists consumers in obtaining home loans noted that many clients who were participating in the federal government's COVID-19 mortgage forbearance program were concerned about whether their incomes would recover enough for them to resume making payments in June, when the program is set to expire.
Contacts expected agricultural income to be solid in 2021, though down some from 2020's strong results: Direct income from agricultural products could be higher in 2021, but federal government payments were expected to be lower. Corn, soybean, and wheat prices moved up during January and early February. Higher crop revenues helped boost demand for farm equipment, and there were reports of low inventories of new equipment in some areas. Cattle and hog prices also moved up from the prior reporting period. Dairy prices were generally down, and producers faced uncertainty regarding demand from government food programs and schools. Looking ahead, recent adverse weather was expected to support prices, particularly for milk and cattle. Cold weather boosted costs for District farmers; more generally, contacts reported rising input costs for both crop farmers and livestock producers driven by higher fertilizer and feed prices. Farmland values continued to increase strongly.
For more information about District economic conditions visit: chicagofed.org/cfsbc