Beige Book Report: Chicago
July 14, 2021
Summary of Economic Activity
Economic activity in the Seventh District increased moderately in late May and June and growth was limited by labor and materials supply constraints in many sectors. Contacts expected strong growth in the coming months. Employment increased strongly, business spending increased moderately, manufacturing increased modestly, and consumer spending and construction and real estate were flat. Wages rose moderately while prices rose strongly. Financial conditions improved slightly. Prospects for agriculture income in 2021 were little changed.
Employment and Wages
Employment increased strongly over the reporting period, and contacts expected a similar-sized increase over the next 12 months. Contacts across sectors reported continued difficulty in finding workers at all skill levels. Some businesses seeking to ramp up production, particularly restaurants, had limited operating hours because of a lack of workers. A temp agency contact said their openings increased and turnover rates were elevated; furthermore, with the ease of finding new positions, workers were being more selective about workplace environment, scheduling flexibility, and pay. Employers, temp agencies, and workforce development organizations pointed to childcare challenges, retirements, and financial support from the government as important factors limiting labor supply and remarked that worker concerns about health safety related to COVID-19 had largely gone away. Overall, wage and benefit costs increased moderately. However, contacts across sectors noted strong pressure to raise wages and there were widespread reports of businesses offering signing bonuses. One contact at a university noted that salaries and retirement benefits that had been cut early in the pandemic had been restored.
Prices
Overall, prices rose strongly in late May and June, though contacts expected a moderate increase in prices over the next 12 months. There were large increases in business output prices, driven by passthrough of higher materials, energy, and transportation costs. Contacts highlighted higher prices for a wide range of materials including metals, metal products, petroleum-based products, chemicals, electronics, and paper. Consumer prices moved up robustly, particularly for new and used vehicles. Contacts pointed to solid demand, limited inventories, and increased costs as sources of consumer price increases.
Consumer Spending
Consumer spending was flat over the reporting period but remained at elevated levels as retailers strained to meet pent-up demand. Contacts said that overall, higher prices hadn't deterred consumers' willingness to spend. Spending on leisure and hospitality services continued to rebound. Contacts noted especially strong recoveries at restaurants, casinos, and concessionaires at sporting venues and national parks. Nonauto retail sales remained strong, particularly in the appliance, grocery, jewelry, and sporting goods sectors. Spending on building materials and lawn and garden slowed but remained at a high level. Brick-and-mortar stores regained some market share from e-commerce. New and used light vehicle sales slowed due to a lack of inventory and dealers indicated that profit margins had widened. Dealers reported that they were increasingly selling from future vehicle allocations from automakers.
Business Spending
Business spending increased moderately in late May and June. Retail inventories were low for many items, and contacts expected inventory challenges to continue through the end of 2021. New and used light vehicle inventories decreased and remained low, and dealers didn't expect new vehicle inventories to improve until the end of the third quarter. Many manufacturing contacts said inventories remained below comfortable levels. Contacts reported ongoing supply chain issues, especially for raw materials, metals, microchips, and specialty parts, and expected the problems to continue into 2022. Demand for transportation services was strong and many contacts reported shipping delays, both from within the U.S. and overseas. Capital expenditures increased moderately, and contacts expected a similar-sized increase over the next twelve months. Many contacts noted that lead times for capital equipment were much longer than usual. One contact said higher inventory expenses were crowding out their capital purchases. Commercial and industrial energy usage increased modestly.
Construction and Real Estate
Construction and real estate activity were little changed from the prior reporting period and remained at a high level. Residential construction decreased modestly, but activity levels were healthy. Residential real estate activity increased slightly, as did home sales, though the low number of homes on the market continued to hold back activity. There was a large increase in home prices, while rents went up a bit. Nonresidential construction was unchanged. A contact in southeast Michigan reported that an increasing number of projects were being postponed because of high concrete and steel prices. Commercial real estate activity was also little changed, and prices and rents were steady.
Manufacturing
Manufacturing production increased modestly in late May and June. Most manufacturing contacts indicated that business was above pre-pandemic levels, but there were also widespread reports of logistical and supply issues holding back growth. Auto output was little changed, as assemblers and suppliers remained constrained by ongoing shortages of parts, notably microchips. Steel production increased slightly, and capacity utilization was at a multiyear high, with contacts reporting greater demand from most industries, with the exception of autos. Demand for heavy machinery increased, led by growth in construction and agriculture. Specialty metals manufacturers reported a moderate increase in orders from an already high level. Many had reached full capacity and were dealing with shortages of materials and longer lead times from suppliers.
Banking and Finance
Financial conditions improved slightly over the reporting period. Participants in equity and bond markets reported a small improvement in conditions. Business loan demand increased moderately. One contact said that once firms were successful in getting their PPP loans forgiven, they were more comfortable taking out new loans to fund capital expenditures. Business loan quality increased slightly, with improvements reported across all sectors. Business loan standards loosened a bit in a very competitive environment. In consumer markets, loan demand increased slightly. Contacts reported that demand remained high, particularly in the auto and housing markets, and that consumer credit quality remained favorable. Loan quality increased slightly, while credit standards were unchanged on balance. Banks continued to be awash in deposits from both businesses and households.
Agriculture
Agriculture stayed on course to earn higher market-based incomes relative to last year, as most product prices remained high enough to offset increased costs for freight, energy, fertilizers, and labor. On net, corn prices were little changed, while soybean prices were a little lower over the reporting period. Although planted corn and soybean acreage was up from last year, it was lower than expected earlier in the growing season, which helped maintain prices. Crop conditions for corn and soybeans were mixed, as some parts of the District were in excellent shape and others were stressed by drought. Hog and milk prices eased off highs during the reporting period, while cattle prices were flat. One contact noted that a lack of workers in slaughterhouses had led to the suspension of some contracts with poultry producers. Farmland values moved higher again.
For more information about District economic conditions visit: chicagofed.org/cfsbc