Beige Book Report: Chicago
March 2, 2022
Summary of Economic Activity
Economic activity in the Seventh District increased moderately in January and early February, 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 increased strongly; consumer spending, business spending, and manufacturing were up modestly; and construction and real estate grew slightly. Wages and prices rose rapidly, while financial conditions deteriorated some. Expectations for 2022 agricultural income moved up.
Labor Markets
Employment increased at a strong pace over the reporting period, and contacts expected moderate growth over the next 12 months. Contacts across sectors reported persistent difficulty in finding workers at all skill levels. That said, one contact indicated it was easier to find workers now than in the fourth quarter of last year. A lack of labor was preventing a number of contacts from producing enough to meet strong demand. In addition, a construction contact reported that limited availability of higher skilled workers meant they were relying more on lower skilled workers, reducing productivity. Contacts also noted that the spread of the Omicron variant had pushed up absenteeism and slowed production; however, workers were typically recovering faster and returning to work sooner than in previous waves. 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. In higher education, one contact noted that institutional policies were limiting wage offers and making it very difficult to hire. To retain workers, many employers increased the frequency of pay raises or profit sharing.
Prices
Overall, prices rose rapidly in January and early February, and contacts expected price increases to continue at a strong pace over the next 12 months. There were large increases in producer prices, driven by pass-through of higher costs for materials, labor, and transportation. However, some contacts in manufacturing said that pricing pressures appeared to have peaked, highlighting an easing of steel and overseas shipping costs. Consumer prices generally moved up robustly. Sources of higher prices included solid demand, limited inventories, increased costs, and a continued ability to pass cost increases on to customers.
Consumer Spending
Consumer spending increased modestly over the reporting period from already high levels. Nonauto retail sales were up some, and contacts indicated that sales exceeded expectations given the Omicron variant's negative impact on foot traffic. Sales of office furniture and building materials increased further, while lawn and garden and appliance spending remained elevated. Contacts noted a shift from eating out to eating at home, as grocery sales moved up and food service demand declined. There was a modest decrease in sales in the home furnishings and electronics sectors. Seasonally adjusted light vehicle sales were up, though sales continued to be constrained by low inventory levels. Dealer profit margins remained strong, reflecting higher vehicle prices. Leisure and hospitality spending was unchanged on balance.
Business Spending
Business spending increased modestly in January and early February. Retail inventories remained low in many sectors due to domestic and international supply chain challenges, and several contacts said they expected the issues to persist into the second half of 2022. Stocks of apparel and food and beverages were especially under pressure. Manufacturing inventories moved up some, though contacts continued to report shortages of a wide range of inputs. One contact indicated that materials availability was more predictable now than in the second half of 2021. Demand for transportation services was little changed as the industry continued to operate at full capacity. Capital expenditures increased moderately, with contacts highlighting technological upgrades (such as new automation equipment) and facility expansions. Lead times for delivery of capital equipment continued to be elevated. Residential and commercial energy consumption edged up. There was a small increase in industrial energy consumption driven by greater utilization by manufacturers.
Construction and Real Estate
Construction and real estate activity increased slightly over the reporting period. Labor shortages and long lead times for materials persisted for both residential and nonresidential builders, stretching project completion times. Residential construction activity increased slightly, and backlogs continued to build. One homebuilder said strong demand made it feel like the spring building season had already started. A nonprofit builder noted that American Rescue Plan money designated for affordable housing was being released more slowly than desired. Residential real estate activity was flat, held back by limited supply. Home prices ticked up, while rents were up moderately. Nonresidential construction activity increased slightly, with one contact highlighting greater demand for office buildout projects. Pricing increased slightly from already high levels. Commercial real estate activity increased slightly, buoyed by robust demand for industrial and multifamily buildings. Retail leasing also picked up. Commercial rents decreased slightly. Commercial prices and vacancy rates were unchanged, while sublease space availability increased moderately.
Manufacturing
Manufacturing production increased modestly in January and early February. Despite strong demand for the majority of manufacturers, capacity constraints due to challenges in securing inputs (particularly labor) limited production gains. Auto output dropped slightly, as assemblers and suppliers continued to face shortages of microchips and other materials. Demand for heavy trucks was steady at a high level, and tight inventories pushed up prices. Steel production ticked up amidst growth in demand from energy and construction customers. Steel availability increased due to large volumes of imports and rising domestic capacity utilization. Demand for building materials was modestly higher, supported by solid orders for commercial and residential construction.
Banking and Finance
Financial conditions deteriorated some over the reporting period. Participants in the equity and bond markets reported an increase in volatility and net declines in asset values. Business loan demand was flat, and contacts continued to report strong competition for deals. Business loan quality was high and improved slightly, while business loan standards reportedly loosened a bit. In consumer markets, loan demand was unchanged overall. Volumes were largely flat across sectors, except for home mortgage refinancing, which declined. One contact noted that while the quantity of auto loans declined, loan values were up enough to result in an increase in the dollar value of auto lending. Consumer loan quality and standards were unchanged.
Agriculture
Rising prices for agricultural products buoyed expectations for farm income in 2022, though input costs rose as well. Corn and soybean prices continued to move up, but prices for energy, fertilizers, and herbicides also rose, and concerns deepened about their availability at planting time given supply chain issues. One contact pointed out a planting decision dilemma: seeds that are more readily available do best when used with herbicides that are in short supply. Supply issues were also delaying some new tractor deliveries, possibly past spring planting. Prices for cattle, hogs, eggs, and milk were up again. Farm finances kept improving, and demand for agricultural loans was lower than a year ago. Farmland prices increased more in 2021 than they had in nearly a decade, with continued growth expected in early 2022.
For more information about District economic conditions visit: chicagofed.org/cfsbc