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Chicago: July 2022

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Beige Book Report: Chicago

July 13, 2022

Summary of Economic Activity
Economic activity in the Seventh District increased slightly overall in late May and June, and contacts expected growth to remain slow in the coming months, with many expressing concerns about the potential for a recession. Employment increased moderately, business spending was up modestly, consumer spending rose slightly, and manufacturing and construction and real estate declined slightly. Wages and prices rose rapidly, while financial conditions tightened some. Agriculture income expectations for 2022 were little changed.

Labor Markets
Employment increased moderately over the reporting period, and contacts expected a similar pace of growth over the next 12 months. Many contacts continued to report difficulty in finding workers across sectors and at all skill levels. That said, some indicated finding workers had become easier. A number of firms noted that a lack of staffing prevented them from operating at desired capacity. Some manufacturers were sufficiently staffed for current conditions but would not be if their supply chain issues were resolved. Overall, wage and benefit costs increased rapidly and were aimed both at attracting new workers and retaining existing talent. In addition to labor market tightness, contacts cited high inflation as an impetus for workers requesting wage increases. Numerous contacts were implementing mid-year wage bumps on top of their usual annual increases to keep up with quickly rising market wages.

Overall, prices rose rapidly in late May and June, though the pace of growth slowed a bit, and contacts expected a further slowdown over the next 12 months. There were large increases in producer prices, spurred by passthrough of higher costs for labor, energy, and shipping. Raw materials cost pressures eased somewhat, with contacts highlighting lower steel, copper, aluminum, and lumber costs. Consumer prices generally moved up robustly due to solid demand, limited inventories, and passthrough of higher costs. A number of business- and consumer-facing contacts indicated that they were experiencing limited pushback on price increases from customers, but others said they were only able to pass on some of their higher costs.

Consumer Spending
Consumer spending increased slightly over the reporting period, though there were signs that discretionary spending was slowing. Rising costs were squeezing some retailers' margins. One contact noted that when higher costs were passed through to consumers, lower income shoppers were trading down and buying more in-store brands, while higher income shoppers were buying more goods in bulk. Nonauto retail sales increased slightly, led by higher grocery and gasoline sales. Demand softened in some durable goods sectors, notably furniture and electronics. Some retailers indicated that because of high inventories, the upcoming back-to-school season would feature more promotions than last year. Light vehicle sales increased slightly overall: Sales of used vehicles were up, but new vehicle sales changed little as they were still constrained by low inventories. New light vehicle prices were unchanged but used light vehicle prices fell slightly. Some auto dealers commented that, unlike during prior periods of high gas prices, consumers weren't looking to trade in light trucks for cars to save on fuel costs.

Business Spending
Business spending increased modestly overall in late May and June. Retail inventories were up modestly, with elevated levels reported in some sectors but low levels in others where supply chain bottlenecks persisted. On balance, manufacturing inventories were moderately elevated, as numerous contacts reported they were building up "just-in-case" stocks of available inputs and that they were forced to hold on to nearly completed products while they waited for a small number of missing parts to arrive. Retail and manufacturing contacts expected inventory challenges to persist into 2023. Demand for transportation services was little changed and remained high. Capital expenditures increased modestly, with contacts reporting purchases of new equipment as well as technology for hybrid work environments. Lead times remained lengthy for some types of capital equipment. One contact noted that higher interest rates had made them more cautious about capital spending plans. Commercial and retail energy consumption increased slightly, with no change in industrial energy consumption.

Construction and Real Estate
Construction and real estate activity decreased slightly on balance over the reporting period. There was a small decline in residential construction. While demand for multi-family space stayed healthy, some existing projects were paused because of cost pressures. Residential real estate activity decreased modestly. Rising mortgage rates were a factor pushing down the number of offers per house; still, home prices were up slightly. Rents rose modestly. Nonresidential construction activity was unchanged, and materials and labor availability challenges continued to push back project completion times. Demand for new industrial space, particularly for warehousing, remained robust. In southeast Michigan, a number of new electric vehicle investments contributed to deep construction project backlogs. Commercial real estate activity was unchanged. One contact indicated that higher interest rates had negatively impacted sales of existing buildings. However, demand for quality commercial space stayed solid.

Manufacturing production decreased slightly in late May and June. Output continued to be held back by difficulties with supply chains and labor availability. Auto production was flat, as shortages of microchips and other materials persisted. Heavy truck demand and prices fell slightly, though both remained high amid very low vehicle inventories. Demand for heavy machinery was up modestly, led by growth in the agriculture sector. Primary metals contacts noted modestly lower demand across a range of sectors. There was a small decrease in demand for fabricated metals, with contacts reporting declines in the automotive sector but growth in agriculture.

Banking and Finance
Financial conditions tightened some on balance over the reporting period. Participants in the equity and bond markets reported rising interest rates, elevated volatility, and net declines in asset values. Business loan demand was little changed overall, though one contact noted that revolver usage had been rising steadily and attributed the increase to rising input costs. Business loan quality was unchanged, while standards tightened some, as contacts expressed greater uncertainty about the future state of the economy. In consumer markets, loan volumes decreased modestly, with contacts continuing to note large declines in mortgage refinancing in the face of rising rates. Consumer loan quality was stable, while standards loosened a bit.

Contacts continued to expect agricultural incomes to be solid for most producers in 2022. Despite worries about supply chain problems, inputs were largely reaching farms in time. Heavy rains in some areas diluted fertilizer and created ponds in fields, hurting potential yields; in other areas there were concerns about dryness and heat. Still, corn and soybean conditions were close to average for much of the District. Corn and soybean prices fell some over the reporting period, while milk prices were generally higher. After widespread flock losses from bird flu, egg-laying capacity began to return and egg prices edged down from elevated levels. Hog and cattle prices increased. Farmland prices moved higher once more.

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