Beige Book Report: Chicago
September 8, 2021
Summary of Economic Activity
Economic activity in the Seventh District increased moderately in July and early August and contacts expected growth to continue at that pace in the coming months. Labor and materials supply constraints as well as rising COVID-19 cases weighed on the expansion. Employment increased strongly, manufacturing grew moderately, business spending was up modestly, construction and real estate rose slightly, and consumer spending decreased slightly. Wages and prices increased strongly while financial conditions slightly improved. There was some retreat in prospects for agricultural income.
Employment and Wages
Employment increased strongly over the reporting period, and contacts expected a similar pace of growth over the next 12 months. Contacts across sectors reported increased difficulty in finding workers at all skill levels despite ramping up recruiting efforts. Some businesses, particularly in the restaurant and manufacturing sectors, were limiting operating hours because of a lack of workers. A contact at a workforce development agency noted that, with the ease of finding new positions, workers were being more discriminating about workplace environment, scheduling flexibility, and pay when choosing a new job. Contacts pointed to childcare challenges, retirements, and financial support from the government as important factors limiting labor supply. A number of contacts indicated that they were delaying the return to in-person work because of rising COVID-19 cases. Overall, wage and benefit costs increased strongly. A scarcity of applicants for open positions had forced a number of contacts to raise wage offers. And some noted that applicants were asking for higher wages than they could afford to pay. In addition, many contacts who usually raise pay annually had given mid-year raises to their existing workforce.
Prices
Overall, prices rose strongly in July and early August, though contacts expected a moderate increase in prices over the next 12 months. There were large increases in producer prices, driven by passthrough of higher materials, energy, labor, and transportation costs. Contacts highlighted significantly higher freight costs as well as price increases for a wide range of materials including metals, metal products, petroleum-based products, chemicals, electronics, and paper. At the consumer level, prices moved up robustly overall. Contacts pointed to solid demand, limited inventories, and increased costs as sources of consumer price increases.
Consumer Spending
Consumer spending decreased slightly over the reporting period but remained at a high level. Spending on leisure and hospitality slowed, with contacts attributing the decline to the spread of the Delta variant. Nonauto retail sales increased slightly. Sales at home improvement, furniture, appliance, electronics, and grocery stores remained at solid levels. Contacts indicated that back to school shopping started strong. A service that analyzes consumer foot traffic in brick-and-mortar stores indicated that activity in the Midwest had recovered to pre-pandemic levels. Light vehicle sales decreased again as new vehicle inventory became even more scarce. Dealer profit margins fell from their recent highs but remained at strong levels. Dealers continued to sell vehicles from their future allotments by automakers.
Business Spending
Business spending increased modestly in July and early August. Retail inventories remained lean in many sectors, and contacts expected inventories to stay lean through the holiday season and into early 2022. New and used light vehicle inventories were very low as auto production continued to lag. In manufacturing, for-sale inventories were moderately low and there were shortages of a wide range of inputs including aluminum, steel, copper, plastics, paints, pallets, paper, glue, and microchips. Some contacts said they were stocking up on inputs in the hopes of avoiding future shutdowns, and several had expanded their vendor portfolio to reduce the risk of supply chain problems. Demand for transportation services outpaced supply, with many contacts reporting delays and sharp increases in rates. Capital expenditures rose some, and contacts expected a similar pace of expansion over the next twelve months. Many contacts noted that lead times for capital equipment were much longer than usual. One contact again said higher inventory expenses were crowding out their capital purchases. Energy demand from commercial customers increased modestly, but demand from industrial customers declined slightly.
Construction and Real Estate
Construction and real estate activity moved up slightly from the prior reporting period. Residential construction was unchanged. Contacts said that higher costs for labor and materials were pushing up prices beyond what some buyers were willing to pay and forcing builders to pause projects. Residential real estate activity was also little changed as low inventories put a ceiling on sales volume. Prices continued to rise. Nonresidential construction activity was unchanged as well, as many existing projects remained hampered by long lead times for materials. Commercial real estate activity ticked up, with both sales and prices slightly higher in recent weeks. Demand for industrial and multi-family properties remained strong. In addition, demand for retail space in high-traffic corridors increased noticeably, as retailers that were able to survive the pandemic expanded their operations.
Manufacturing
Manufacturing production increased moderately in July and early August. Most manufacturing contacts reported that business was above pre-pandemic levels, and many were running at full capacity. Labor and supply chain challenges were widely reported as the primary factors limiting further growth. Auto output decreased as shortages of microchips and other materials hampered production. Demand for heavy machinery grew robustly, led by higher sales in construction and agriculture. Demand for heavy trucks was also strong. Contacts reported higher steel demand from most industries. Steel service center inventories were low, but not as tight as early in the year. Specialty metals and chemical manufacturers reported a moderate increase in sales. Although orders were up for some kinds of building materials, shipments of others moderated as home builders were squeezed by labor and materials costs.
Banking and Finance
Financial conditions improved slightly over the reporting period. Participants in equity and bond markets said there was little change in conditions. Business loan demand increased slightly. Banking contacts noted that loan growth was a challenge as many potential borrowers had sufficient cash and others had nonbank sources of funds. Business loan quality increased some, with improvements reported across all sectors. Business loan standards loosened slightly on balance. There were reports of a pickup in M&A activity. In consumer markets, loan demand increased slightly, led by growth in vehicle and credit card volumes. Consumer loan quality improved, with one contact noting that quality was at an all-time high. High prices for vehicle repossessions helped reduce loan losses. Loan standards were unchanged on balance.
Agriculture
Although most agriculture prices were higher than a year ago, farm incomes were expected to be down in 2021 with the end of pandemic-related government support payments. Cattle and egg prices increased during the reporting period. Milk producers faced lower margins as transportation costs rose and output prices mostly moved sideways. Contacts hoped reopening schools would boost bottled milk demand. Hog, corn, and soybean prices retreated from their recent highs. Relatively tight supplies of crops helped support corn and soybean prices. District corn and soybean harvests were expected to be near record levels, though parts of the region still faced a drought. Concerns grew that strained logistics would lead to shortages of parts for farm equipment during harvest and clog the movement of crops to markets. Farmland values kept climbing.
For more information about District economic conditions visit: chicagofed.org/cfsbc