Beige Book Report: Chicago
April 19, 2023
Summary of Economic Activity
Economic activity in the Seventh District was little changed overall in late February and March. Contacts generally expected slow growth in the coming months, though many expressed concerns about the potential for a recession in the coming year. Employment increased moderately; consumer spending, business spending, and construction and real estate were flat; nonbusiness contacts saw little change in activity; and manufacturing demand decreased modestly. Prices and wages rose moderately, and financial conditions tightened moderately. Banking contacts reported some movement in deposits but little change in credit availability following the collapse of Silicon Valley Bank. Agricultural incomes were expected to be lower in 2023 than in 2022.
Labor Markets
Employment increased moderately over the reporting period and contacts expected slower employment growth over the next 12 months. Many contacts continued to have difficulty finding workers, especially those in the skilled trades. At the same time, however, many said hiring was easier compared with a few months ago. Some manufacturers reported that with a slowdown in orders, they were feeling less urgency to fill open positions and were more willing to wait for the right candidate. One contact in state government saw signs of less labor hoarding, as businesses were making less of an effort to keep underutilized or underperforming workers. Wage and benefit costs rose moderately, with several contacts indicating that regular annual wage and benefit increases had recently taken effect.
Prices
Prices rose moderately in late February and March, and contacts expected a similar rate of increase over the next 12 months. Producer prices rose modestly, with contacts highlighting higher costs for raw materials (particularly steel) and energy. Several contacts noted that growth in shipping costs had slowed noticeably, particularly for containers and ocean freight. Consumer prices generally increased due to the continued elevated level of demand and the passthrough of higher costs.
Consumer Spending
Consumer spending was unchanged on balance over the reporting period. Nonauto retail sales were slightly softer, with contacts noting declines for gasoline and building materials and lower than expected sales of furniture and electronics. Light vehicle sales were unchanged overall, and service and parts demand remained strong. Leisure and hospitality spending increased slightly, driven by greater spending in travel categories such as cruise lines and travel agencies.
Business Spending
Business spending was stable overall in late February and March. Capital expenditures increased modestly, with several contacts reporting spending on renovation or expansion of existing structures. Demand for transportation services decreased some, though activity remained at a high level. Demand for residential, commercial, and industrial energy decreased slightly, with one contact highlighting declines from manufacturing and small commercial enterprises. Inventories for most retailers were at comfortable levels. Though auto inventories continued to move up, according to a survey of dealers they were still only around half of pre-pandemic levels. In manufacturing, inventories stayed slightly elevated, and many contacts indicated that they were no longer experiencing supply chain disruptions. A construction contact noted that materials availability had improved to the point that certain suppliers were no longer taking orders more than a few weeks in advance.
Construction and Real Estate
Construction and real estate activity was little changed on balance over the reporting period. Residential construction decreased slightly, while residential real estate activity was up modestly across segments. One contact attributed the pickup in sales to lower mortgage rates. Home prices and rents moved up modestly. Nonresidential construction activity was little changed overall, though contacts highlighted renovation of hospitality space as an area of growth. Elevated construction costs continued to hold back new projects. Commercial real estate activity decreased moderately, though some contacts said deal flow was still at a healthy level. Demand for leased multifamily space increased while demand for office space continued to fall. Prices and rents were down slightly. Vacancy rates increased slightly, and the amount of sublease space grew modestly.
Manufacturing
Manufacturing demand decreased modestly in late February and March. Steel orders decreased slightly. Fabricated metals orders were down modestly, with several contacts citing the automotive sector as a reason for declines. Auto production fell slightly. Machinery sales were up slightly, and one contact highlighted stronger demand from the aerospace sector. Heavy truck orders moved up slightly and backlogs remained very high.
Banking and Finance
Financial conditions tightened moderately over the reporting period. Bond and stock markets saw little change in asset values on net, though volatility spiked and asset values temporarily fell following the collapse of Silicon Valley Bank (SVB). Banking contacts reported fielding some inquiries about deposit safety after SVB's failure and also saw some deposit transfers. A contact at a large bank that received new deposits was uncertain whether the deposits would stick once there was more clarity about the health of smaller banks. Business loan volumes decreased slightly, with one contact noting that clients producing durable goods were most likely to be struggling. Business loan quality was stable, and contacts did not report changes in lending standards. The consumer loan market saw a slight decrease in the volume of loans, led by further declines in refinancing activity. Consumer lending standards tightened slightly, while loan quality was stable.
Agriculture
With input costs remaining elevated and many product prices down, contacts expected lower agricultural income for the District in 2023 compared with a strong 2022. Wheat prices were generally lower over the reporting period, during which the agreement for exporting grain from Ukraine was extended into May. Corn and soybean prices were also lower despite smaller estimates for the South American harvest. Planting delays were likely in some places in the District due to excess precipitation, though contacts noted the extra moisture could also recharge ground water levels for use later in the growing season. Although fertilizer costs fell, the cost of most other inputs remained high for crop farms. Cattle prices increased as the U.S. herd was squeezed by drought and a harsh winter. Egg prices moved up, while dairy and hog prices were down. High feed costs continued to compress most livestock margins. Prices for agricultural land continued to rise, reportedly at a slower pace.
Community Conditions
Community development organizations and public administrators reported little change in overall economic activity through March. Demand for social services remaining elevated despite reports of overall economic strength. State government officials again saw healthy growth in tax revenues and low levels of unemployment insurance claims. Despite slow growth and funding challenges, small businesses and nonprofits continued to be focused on employee recruitment and retention and were not reporting plans for layoffs. High interest rates and elevated supply costs continued to challenge plans to expand availability of affordable housing units and childcare facilities, non-profit developers reported. Family-facing organizations said there were signs of slower growth in consumer prices; however, the end of Covid-era benefits was putting new stress on household budgets.
For more information about District economic conditions visit: https://www.chicagofed.org/research/data/cfsec/current-data