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Beige Book Report: Chicago
April 14, 2021
Summary of Economic Activity
Economic activity in the Seventh District increased moderately in late February and March but remained below its pre-pandemic level. Contacts expected growth to pick up in the coming months, but most did not anticipate full recovery until at least the first half of 2022. Employment, consumer spending, business spending and manufacturing production increased moderately, while construction and real estate was flat. Wages and prices rose modestly. Financial conditions were little changed. Prospects for agriculture income in 2021 improved.
Employment and Wages
Overall, employment increased moderately over the reporting period and contacts expected a robust increase over the next 12 months. Contacts indicated that employee absenteeism due to Covid-19 infections or exposures was minimal. Numerous contacts reported difficulty finding workers, particularly at the entry level. Some said that hiring challenges were greater than prior to the pandemic. Manufacturers indicated that turnover of new temporary workers was elevated, with some never showing up for work. Employers, temp agencies, and workforce development organizations pointed to a number of factors limiting labor supply, including health safety concerns, childcare challenges, cutbacks in public transportation schedules, job search fatigue, and financial support from the government. Overall, wages and benefit costs increased modestly, though multiple contacts in manufacturing noted strong wage pressures, particularly at the entry level.
Prices increased modestly overall in late February and March, and contacts expected a moderate increase in prices over the next 12 months. Consumer prices moved up modestly overall, though there were larger increases in new and used vehicle prices. Business output prices generally moved up only modestly even though input costs were up moderately, led by higher shipping rates and large increases in energy and raw materials prices. Prices for metals, metal products, and lumber were noticeably higher. Many manufacturers reported passing on at least some higher wage and materials costs to their customers, though one indicated that he could not raise prices until contracts come up for renewal in the summer. A construction contact noted that some single-family homebuilding contracts are now being written with allowances for changes in the cost of lumber.
Consumer spending increased moderately over the reporting period. Contacts said that looser pandemic-related restrictions and stimulus checks from the American Rescue Plan helped support activity. Demand for leisure and hospitality services, most notably air travel and restaurants, was noticeably stronger. Nonauto retail sales increased moderately, with high levels of demand for groceries, appliances, furniture, electronics, home furnishings, and jewelry. E-commerce spending continued to be robust. New and used vehicle sales increased at solid rates despite low inventories in both markets, leading to increased profits for some dealers. Spending on vehicle services and parts rebounded to normal levels.
Business spending increased moderately in late February and March. Inventories continued to be lean in many retail segments due to high demand, and shortfalls in select categories were expected to persist into the second half of this year. Shortages were particularly notable in motor vehicles, with some dealers reporting stockouts of certain popular light truck models and many expressing uncertainty over deliveries from manufacturers. Contacts expected little improvement in the supply situation over the remainder of 2021. Manufacturing inventories were slightly below comfortable levels. Contacts continued to report supply chain issues related to raw materials (particularly steel and lumber), microchips, specialty parts, and appliances to outfit new construction. Some contacts reported that shipping bottlenecks, made worse by the Suez Canal closure, were delaying deliveries. Capital expenditures were up moderately, and contacts expected a moderate increase over the next twelve months. There was a small increase in commercial energy consumption, helped by greater demand from restaurants, but little change in industrial energy consumption. One contact noted that higher natural gas prices resulted in greater usage of coal for electricity generation.
Construction and Real Estate
On the whole, construction and real estate demand was flat over the reporting period. Residential construction increased somewhat, led by a rise in home remodeling activity. Residential real estate activity increased slightly. Although demand was at a strong level, very tight inventories were slowing the pace of sales, especially for starter homes. Home prices increased moderately, while rents increased slightly. Nonresidential construction fell marginally, led by a decline in the office segment. One contact noted an increase in backlogs because developers had to pause building while they obtained additional financing to cover rising construction costs. In commercial real estate, sales, prices, and vacancy rates all were relatively unchanged. Demand for industrial properties remained high while demand for office and retail properties remained low. Contacts noted that, as rental deferrals expired, a growing number of retailers were signing contracts where rent is specified as a percentage of sales. In addition, there were reports that contracts were either being written for shorter periods or with gradual rent increases over the life of the lease.
Manufacturing production increased moderately in late February and March. Some manufacturers reported that business was above pre-pandemic levels. Auto output declined slightly as some assemblers and suppliers were constrained by shortages of parts, such as microchips. Steel production increased moderately, driven by rising demand from the construction and energy sectors. Demand for heavy machinery increased slightly, led by growth in agriculture. Specialty metals manufacturers reported a moderate increase in sales, with growth spread across a wide range of sectors. Many contacts in specialty metals said that materials shortages were resulting in delayed deliveries. Demand for building materials increased moderately, supported by growth in new homebuilding and remodeling.
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 increased slightly, led by growth from manufacturing and healthcare. Contacts reported continued aggressive pricing of financial products and that lending standards loosened slightly. Business loan quality improved slightly on balance, though there were declines in the hospitality sector. In consumer markets, loan demand was little changed overall and across most sectors. Residential mortgage activity was solid, though refinancing slowed. Contacts reported a decrease in consumer loan balances following the latest round of stimulus payments. Consumer loan quality increased slightly, while standards loosened slightly.
Prospects for agriculture income in 2021 improved as many agricultural prices rose and more federal support was announced. Corn and soybean prices moved higher during the reporting period, while wheat prices lagged. Dry conditions in much of the District set the stage for a fast planting season, with some types of planting already having begun. Cattle, egg, hog, and dairy prices increased during late February and March. While higher feed costs hurt livestock producers, the outlook for profits was still good. Farm equipment sales continued to be strong, and farmland values again rose.
For more information about District economic conditions visit: chicagofed.org/cfsbc