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Chicago: June 2022

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Beige Book Report: Chicago

June 1, 2022

Summary of Economic Activity
Economic activity in the Seventh District increased modestly overall in April and early May, though contacts expected a slower pace of growth over the coming months. Labor and materials supply constraints continued to weigh on the expansion. Employment increased strongly, manufacturing was up moderately, consumer spending moved up modestly, business spending was slightly higher, and construction and real estate activity declined slightly. Wages and prices rose rapidly, while financial conditions deteriorated some. Agriculture income expectations for 2022 were little changed.

Labor Markets
Employment increased at a strong pace over the reporting period, and contacts expected moderate growth over the next 12 months. Despite robust hiring, there were reports of difficulty in finding workers across sectors and at all skill levels, and a number of firms indicated that a lack of staffing prevented them from operating at desired capacity. High turnover rates continued to be an issue for some contacts, and there were multiple reports of new hires never showing up for work. One contact noted that they were able to hire but had to settle for less-qualified candidates. A contact in manufacturing reported investing in robotics to substitute for labor in some of their production processes. Overall, wage and benefit costs increased rapidly, both to attract new workers and to retain existing talent. In addition to labor market tightness, contacts cited high inflation as an impetus for workers requesting higher wages. Many contacts indicated that they were offering workers more flexibility in terms of hours and work-at-home arrangements.

Overall, prices rose rapidly in April and early May, and contacts expected price increases to continue at a strong pace over the next 12 months. There were large increases in producer prices, spurred by passthrough of higher costs for labor, transportation, energy, some metals, and other materials. That said, some contacts reported that the pace of growth in raw materials and energy prices had slowed. Consumer prices generally moved up robustly due to solid demand, limited inventories, and passthrough of higher costs. Most contacts indicated that they were experiencing only limited pushback on price increases from customers, but some said they were seeing more resistance to higher prices than in previous reporting periods.

Consumer Spending
Consumer spending increased modestly over the reporting period. Nonauto retail sales were up moderately, though much of the increase reflected higher prices rather than greater volumes. There were reports of a shift in the mix of purchases from discretionary items toward essential goods. Moreover, a growing number of consumers were picking less expensive options when purchasing products. In addition, a regional food bank reported a considerable increase in demand. Among product lines, grocery sales increased modestly, but spending was flat on appliances and electronics and at discount stores. Spending on furniture and home furnishings fell. Leisure and hospitality results were mixed overall, though future bookings indicated that demand for summer travel was strong. Light vehicle sales were flat and still constrained by low inventory levels. Elevated prices continued to support high dealer profit margins.

Business Spending
Business spending increased slightly in April and early May. Retail inventories were up a bit overall but remained at low levels in many sectors as supply chain bottlenecks persisted. Only spotty improvement was expected by the end of the year. Manufacturing inventories were comfortable overall, though some contacts said lead times lengthened. A wide range of inputs remained difficult to find. Manufacturing and retail contacts expressed concern that the COVID-19 outbreak in China would result in further supply disruptions. Demand for transportation services was little changed as the industry continued to operate full out. Capital expenditures grew slightly, with many contacts reporting purchases of new equipment and technology for hybrid work environments. Lead times remained lengthy for some types of capital equipment. Commercial and industrial energy consumption increased slightly, led by manufacturing, while residential energy consumption decreased slightly.

Construction and Real Estate
Construction and real estate activity decreased slightly on net over the reporting period. Contacts in both residential and nonresidential construction noted that higher labor and material costs continued to encumber activity, and that rising interest rates had also begun to weigh on demand. Multiple contacts mentioned that it was more cost effective to buy materials in advance of a project start than to purchase materials as needed once building began. Residential construction decreased slightly. While demand remained strong on the multifamily side, activity levels in the single-family segment fell, including for remodeling. Residential real estate activity decreased modestly as rising prices and mortgage rates hurt affordability. Low inventory levels continued to put upward pressure on home prices. Rents increased moderately. Nonresidential construction activity rose slightly. Demand for industrial projects, specifically for warehousing and infrastructure, remained robust. Overall, commercial real estate demand was unchanged, as were prices and rents. However, contacts noted that demand for smaller spaces, particularly in freestanding buildings, had increased.

Manufacturing production increased moderately in April and early May despite challenges with supply chain shortages and securing labor. Auto output increased some, though contacts were still reporting shortages of microchips and other materials. Heavy truck demand rose slightly; production was also up a bit, but high prices persisted amid very low inventories. Demand for heavy machinery was strong, outstripping availability because of manufacturers' capacity constraints. Steel production increased a bit, and demand moved up, with contacts highlighting greater sales to the energy industry. Sales of fabricated metals decreased slightly overall.

Banking and Finance
Financial conditions deteriorated on balance over the reporting period. Participants in the equity and bond markets reported rising interest rates, greater volatility, and net declines in asset values. Business loan demand increased slightly, with contacts reporting growth in lending for commercial vehicles, restaurants, and construction. Business loan quality and standards remained unchanged on net. In consumer markets, loan demand decreased modestly, with contacts noting large declines in mortgage refinancing. Loan quality was unchanged on balance, while credit standards tightened slightly over the reporting period.

Farm net income expectations for 2022 were little changed overall during the reporting period, as prices and costs increased by similar amounts. Corn, soybean, and wheat prices were all up, as were prices for diesel and propane. Cool, wet weather slowed spring planting for corn and soybeans. In addition, concerns lingered about whether fertilizer would arrive at farms on time. Strong dairy exports helped boost milk prices. Bird flu continued to ravage poultry farms, pushing up egg prices. Hog prices moved sideways, while cattle prices were lower. As with crop farmers, livestock producers also faced higher input costs. Agricultural land prices continued to rise strongly.

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