Beige Book Report: Chicago
December 1, 2021
Summary of Economic Activity
Economic activity in the Seventh District increased moderately in October and early November, and contacts expected a similar pace of growth over the coming months. Labor and materials supply constraints as well as the spread of COVID-19 continued to weigh on the expansion. Employment and business spending grew moderately; consumer spending and manufacturing were up modestly; and construction and real estate was flat. Wages and prices increased strongly, while financial conditions improved slightly. A larger than expected corn and soybean harvest pushed up anticipated 2021 farm income.
Employment and Wages
Employment increased at a moderate pace over the reporting period, and contacts expected a similar pace of growth over the next 12 months. Contacts across sectors again reported difficulty in finding workers at all skill levels. Many businesses continued to limit operating hours because of labor challenges, especially in the restaurant, retail, and manufacturing sectors. In addition, a few contacts in the professional services sector said labor constraints were slowing the completion of existing projects and delaying the start of new ones. Contacts pointed to childcare issues, school quarantines, retirements, and health safety concerns as factors limiting labor supply. There were also a few reports of workers quitting jobs to avoid vaccination requirements. The pandemic caused some companies to further delay plans to return to in-person work, and there were some reports of business closures after COVID-19 exposures forced workers to quarantine. Overall, wage and benefit costs increased robustly. A scarcity of applicants for open positions led numerous contacts to raise wage offers, yet not all were successful in filling open positions. With starting wages rising, many firms were boosting pay for existing workers in order to retain them. In addition, turnover rates were higher than usual.
Prices
Overall, prices rose rapidly in October and early November, and contacts expected price increases to stay at a strong pace over the next 12 months. There were large increases in producer prices, driven by pass-through of higher materials, energy, labor, and transportation costs. However, contacts noted that some materials prices, particularly for lumber and certain steel products, had stabilized after very large increases earlier in the year. Consumer prices moved up robustly overall. Contacts pointed to solid demand, limited inventories, increased costs, and a greater ability to pass on cost increases to customers as sources of higher consumer prices.
Consumer Spending
Consumer spending was up modestly over the reporting period from an already high level. Spending on leisure and hospitality declined some, notably at hotels, and especially in areas affected by convention cancelations. Restaurant sales were little changed. Nonauto retail sales increased moderately. Halloween-related sales were noticeably stronger than typical years. Contacts indicated that demand for furniture and electronics remained solid, though appliance and home supply sales were constrained by availability and prices. Sales at discount stores increased significantly, and spending at department stores was stronger than expected, especially for jewelry, apparel, and accessories. Grocery sales volumes were flat, but at a high level. After adjusting for inflation, most forecasts expect holiday spending to increase modestly versus last year. Light vehicle sales were little changed in recent weeks, as inventories remained extremely low. Dealer profit margins remained above their long run averages.
Business Spending
Business spending increased moderately in October and early November. Retail inventories remained lean in many sectors due to ongoing supply chain and logistics challenges, and contacts expected the issues to continue into the second half of 2022. In manufacturing, for-sale inventories rose slightly but were still tight, and there were shortages of a wide range of inputs including certain metals, chemicals, resins, foam, adhesives, pallets, paper, and electrical components. Demand for transportation services remained elevated, with many contacts reporting continued domestic and international shipping delays and high cargo and freight rates. Capital expenditures increased moderately, and contacts expected a similar pace of expansion over the next twelve months. Lead times remained long for some types of equipment. Commercial energy consumption decreased slightly, particularly for smaller establishments, while residential energy consumption increased slightly.
Construction and Real Estate
Construction and real estate activity was similar to the previous reporting period. Residential construction was unchanged. Builders indicated that demand was solid, but material and labor shortages continued to limit activity. Multifamily construction and redevelopment continued at high levels. Residential real estate activity was steady, and prices and rents moved up slightly. Nonresidential construction was mixed, and prices increased modestly. As with residential construction, materials and labor supply challenges held back growth in nonresidential construction. Commercial real estate activity was little changed on net. Industrial space remained in high demand. A contact based in southeast Michigan reported that many multifamily transactions were being completed despite rising costs. Overall, commercial real estate sales prices increased slightly, but rents were little changed. Vacancy rates were little changed as well.
Manufacturing
Manufacturing production grew modestly in October and early November, and contacts reported high backlogs of unfilled orders. Manufacturers with strong demand were generally able to increase output, though ongoing labor and logistical challenges held back production gains for many. Auto production increased slightly, remaining at low levels as assemblers and suppliers were constrained by the ongoing shortage of microchips and other materials. Heavy truck demand was strong, driving down inventories and driving up prices for used trucks. Contacts reported little change in steel demand, which stayed at a high level. Demand for steel from the automotive sector was low but picked up some. Building materials demand fell slightly yet continued to be strong, supported by solid orders from commercial construction.
Banking and Finance
Financial conditions improved slightly over the reporting period. Business loan demand increased somewhat, with contacts reporting an increase in commercial loan demand for acquisition financing and lines of credit to cover higher inventory costs. Construction and multifamily financing also rose. Business loan quality increased slightly, while loan standards loosened. In consumer markets, loan demand was slightly higher overall. Contacts highlighted continued high levels of demand for auto financing, but mortgage activity weakened some from a solid level. Loan quality increased slightly, while standards remained unchanged on balance over the reporting period.
Agriculture
Expectations for farm incomes in 2021 moved up, driven by stronger than anticipated corn and soybean yields. Contacts said the soybean harvest would likely set a District record, and the corn harvest would likely be the third largest ever. Despite a sizeable harvest, corn prices moved higher during the reporting period. Soybean prices languished but were still above year-ago levels. Farmers were reportedly purchasing inputs for 2022 ahead of their normal schedules because of concerns about future prices and availability of fuels, chemicals, fertilizers, and seeds. Prices for hogs and eggs edged lower. Cattle and dairy price movements were mixed. Agricultural land values moved sharply higher.
For more information about District economic conditions visit: chicagofed.org/cfsbc