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Chicago: November 2022

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Beige Book Report: Chicago

November 30, 2022

Summary of Economic Activity
Economic activity in the Seventh District was little changed overall in October and early November. Contacts expected slow growth in the coming months, with many expressing concerns about the potential for a recession in 2023. Employment increased moderately; manufacturing increased slightly; consumer and business spending were unchanged; and construction and real estate decreased modestly. Nonbusiness contacts saw little change in District economic activity. Prices rose rapidly, wages were up moderately, and financial conditions were unchanged on net. Agriculture profit expectations for 2022 were up a bit.

Labor Markets
Employment increased moderately in October and early November, though contacts expected the pace of growth to slow over the next 12 months. Contacts continued to report difficulty finding workers across all sectors and skill levels, though worker turnover slowed and hiring was somewhat easier. Several contacts noted that despite a slowdown in sales, they were retaining workers because of earlier difficulties in hiring staff. Overall, wage and benefit costs increased moderately, albeit at a slower pace than the prior reporting period. Compensation increases were aimed both at attracting new workers and retaining existing talent.

Prices rose rapidly over the reporting period. However, the pace of price increases had moderated from the previous reporting period and contacts expected a further slowdown over the next 12 months. Producer prices increased moderately, with reports of higher energy, shipping, and raw materials costs. Consumer prices generally moved up due to solid demand and passthrough of higher costs. That said, there were signs of easing cost pressures. As an example, a grocer said suppliers continued to seek price increases, but that they were pushing back and winning some concessions.

Consumer Spending
Consumer spending was little changed on net over the reporting period. Nonauto consumer spending increased slightly, with contacts highlighting greater sales of movie tickets, furniture, appliances, and pet supplies. Spending on apparel decreased, while promotions increased. Retailers expected holiday sales revenues to be up some compared with last year due to higher prices, but unit sales were expected to be lower. New and used light vehicle sales decreased somewhat, with dealers indicating that high vehicle prices and interest rates were suppressing demand.

Business Spending
Business spending was little changed in October and early November. Retail inventories were elevated overall, and contacts said retailers are planning to pare them down to pre-pandemic levels. New light vehicle inventories improved modestly yet remained well below pre-pandemic levels. In manufacturing, inventories were still elevated, as supply chain issues continued to lead firms to hold "just in case" parts and partially finished products. Capital expenditures remained stable on balance, with contacts purchasing new equipment (some for automating processes) and upgrading software. Demand for commercial, residential, and industrial energy consumption increased slightly.

Construction and Real Estate
Construction and real estate activity decreased modestly on balance over the reporting period. Residential construction moved down modestly, largely in the single-family segment. Delays and cancellations increased for both single- and multifamily projects. One builder said that the market to purchase land for new development had dried up because builders are waiting for demand to come back. Residential real estate activity decreased moderately. Homebuyers were shocked by how quickly mortgage rates had risen, according to a contact. Home values were down modestly, but rents were up again. Nonresidential construction was little changed. Construction of industrial space and remodeling of office space held steady. That said, some projects were moving very slowly because of increases in building costs and interest rates. Material and labor costs remained elevated. Commercial real estate activity decreased modestly, and prices and rents moved down slightly. Contacts noted that some recent commercial deals were based on the assumption that interest rates would come down from present levels and that the borrower could refinance when they did. Both commercial vacancy rates and the amount of sublease space available increased slightly.

Manufacturing demand was up slightly in October and early November. Contacts reported a small decrease in order backlogs. While production edged up, it continued to be held back by labor and supply chain challenges. Steel demand grew modestly and orders and production of fabricated metals were flat, with greater demand from the defense and energy sectors but less demand from construction. Auto production increased slightly, and contacts expected pent-up demand to support output through 2023. Heavy truck production grew modestly, and backlogs remained very large. Demand for heavy machinery was flat.

Banking and Finance
Financial conditions were little changed on balance over the reporting period. Participants in the equity and bond markets reported net increases in asset values and lower volatility. Business loan volumes were flat overall, and contacts indicated that higher borrowing rates and elevated uncertainty were putting a damper on demand. Business loan quality decreased slightly, with one contact noting declines among clients in the capital goods, retail, and consumer durables sectors. Business loan standards tightened modestly. In consumer markets, loan volumes slowed modestly, with continued declines in mortgage lending in the face of higher rates. Consumer loan quality and standards remained the same.

Overall, expectations for District agricultural income in 2022 rose a bit, reflecting the strong corn and soybean harvests. Despite pockets of poor yields from drought, District corn and soybean yields were close to the records set in 2021. Barge shipments continued to be constrained due to low water levels on the Mississippi, pushing up shipping costs, limiting exports, and reducing the availability of chemicals and fertilizers. The costs of most inputs remained elevated. Corn prices were lower, while soybean prices moved higher. Dairy and hog prices were generally down, though egg and cattle prices were up.

Community Conditions
Community development organizations and public administrators saw little change in economic activity in October and early November. State government officials reported healthy growth in tax revenues over the reporting period. Demand for unemployment insurance remained low, though there were reports of layoffs at order fulfillment centers and mortgage lenders. Small businesses and nonprofit organizations continued to face hiring difficulties at the wages they could afford to pay. Nonprofits assisting low- and moderate-income households again noted that inflationary pressures were straining budgets, leading to food insecurity and strong demand for their services. Faced with declining revenues, however, nonprofit leaders were making tough choices on which services to provide and which to cut.

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