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Chicago: June 2021

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Beige Book Report: Chicago

June 2, 2021

Summary of Economic Activity
Economic activity in the Seventh District increased moderately in April and early May and approached its pre-pandemic level. Contacts expected strong growth in the coming months. Employment, consumer spending, business spending, and manufacturing production all increased moderately, while construction and real estate was flat. Wages and prices rose moderately and financial conditions improved slightly. Prospects for agriculture income in 2021 improved.

Employment and Wages
Employment increased moderately over the reporting period, and contacts expected a strong increase over the next 12 months. Contacts again reported minimal employee absenteeism due to Covid-19 infections or exposures. Help wanted signs sprouted across the District as businesses sought to meet growing demand. Contacts across sectors reported greater difficulty in finding workers, particularly at the entry level. 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, wage and benefit costs increased moderately. However, contacts across sectors noted strong pressure to raise wages, particularly at the entry level, and there were widespread reports of businesses offering signing bonuses. In addition, there was an increase in reports of firms hiring employees away from other firms by offering greater pay.

Overall, prices rose moderately in April and early May, and contacts expected similar-sized increases over the next 12 months. Contacts noted that prices for copper, steel, aluminum, metal products, resins, natural gas, food products, PVC pipes, and lumber were noticeably higher. Business output prices moved up moderately, driven by passthrough of higher material, energy, and transportation costs. Many manufacturers said that unlike usual, they were able to raise prices with little pushback. Consumer prices moved up moderately due largely to increased costs; in response there were reports of some retailers limiting operating hours or trying to cut costs by renegotiating leases.

Consumer Spending
Consumer spending increased moderately over the reporting period. Contacts said that looser pandemic-related restrictions and stimulus payments from the American Rescue Plan supported activity, though the impact of the payments had waned in recent weeks. Spending on leisure and hospitality services rose but stayed below pre-pandemic levels. Nonauto retail sales increased moderately, with continuing high levels of demand for furniture, home furnishings, home improvements, electronics, appliances, and sporting goods. Grocery store sales remained healthy and there were again reports of consumers trading up for more expensive items, such as premium meat cuts, finer wines, and seafood. Contacts from some large open-air shopping centers reported that consumer traffic levels had recovered to or remained just below 2019 levels. New and used light vehicle sales increased modestly from a high level, but with sales constrained by issues of vehicle availability.

Business Spending
Business spending increased moderately in April and early May. Retail inventories were uncomfortably low for many items, and contacts expected challenges to continue through much of 2021. New and used light vehicle inventory levels fell further—to very low levels for new vehicles. One dealer reported that their stocks were at 33% of normal and that the manufacturer indicated the situation wouldn't improve until August at the earliest. Many manufacturing contacts said inventories were below comfortable levels. Contacts noted that supply chain issues had worsened, particularly for raw materials, microchips, and specialty parts. They expected little improvement through the end of the year. Demand for transportation services increased moderately. Many contacts reported ongoing shipping delays, both from overseas and within the U.S. Capital expenditures were up moderately, and contacts expected a moderate increase over the next twelve months. Several contacts said that long wait times for equipment were holding back spending. Demand for commercial and industrial energy consumption was little changed overall.

Construction and Real Estate
Construction and real estate activity increased slightly over the reporting period. Residential construction was little changed from a strong level. Contacts said that rising costs due to limited lot availability and higher material costs (particularly for lumber) were putting a damper on building. Home remodeling activity was strong and continued to grow. Residential real estate activity increased moderately despite low inventory levels. Strong demand pushed home prices up noticeably, with many selling for well above list price. Residential rents edged up. Nonresidential construction increased slightly, with contacts highlighting growth in the industrial and transportation infrastructure sectors. Commercial real estate activity was little changed overall. Rising demand for industrial space was offset by falling demand for office and retail space. That said, a few contacts noted that retail space that had emptied earlier in the pandemic was starting to fill again. Commercial real estate prices increased marginally and rents were unchanged. The availability of sublease space was up modestly as some offices trimmed their post-pandemic footprint.

Manufacturing production increased moderately in April and early May despite widely reported supply chain challenges. Most manufacturing contacts said that business was above pre-pandemic levels. Auto output declined slightly due to parts shortages, notably of microchips. Steel production increased moderately to meet growing demand from manufacturers, builders, and the energy sector. Demand for heavy machinery also grew moderately, spurred by growth for construction, mining, and agriculture. Specialty metals manufacturers reported a solid increase in shipments, but also a large increase in backlogs as they struggled to keep up with demand.

Banking and Finance
Financial conditions improved slightly over the reporting period. Participants in the equity and bond markets reported a small improvement in conditions, though volatility remained elevated. Lenders continued to report that businesses and households had large amounts of cash on hand to finance spending. Business loan volumes were little changed on balance, with contacts highlighting strength in construction and manufacturing, but weakness in commercial real estate and leisure and hospitality. Business loan quality increased slightly across most segments. Contacts reported stiff competition for loan opportunities and that standards had loosened a bit. In consumer markets, loan demand increased modestly, led by ongoing growth in residential mortgage activity. Consumer loan quality increased slightly, while credit standards were little changed.

Expectations for farm income in 2021 strengthened across sectors in April and early May. Drought and dry weather conditions were an issue across a substantial portion of the District, though timely rains could still erase most of the impact. Frosts damaged some plants and trees, with potentially heavy losses for fruit producers. Corn and soybean planting proceeded ahead of the normal pace. Corn, soybean, and wheat prices moved up and were near multi-year highs. Hog, cattle, and milk prices rose, helped by strong meat and dairy exports. Egg prices dropped however. Despite higher prices, livestock producers' margins were little improved because of higher feed costs. Farmland values increased once again, because of to strong demand and limited inventory.