Beige Book Report: Chicago
May 31, 2023
Summary of Economic Activity
Economic activity in the Seventh District was little changed overall in April and early May. Contacts generally expected slow growth in the coming months, though many expressed concerns about the potential for a recession over the next year. Employment increased moderately; nonbusiness contacts saw a small increase in activity; consumer and business spending were flat; and activity decreased modestly both for manufacturing and for construction and real estate. Prices and wages rose moderately, while financial conditions tightened modestly. Expectations for farm incomes in 2023 decreased some.
Labor Markets
Employment increased moderately over the reporting period and contacts expected a similar rate of growth in the coming year. Many contacts continued to have difficulty finding workers, especially when hiring for skilled trades positions. However, more contacts said that hiring had become easier or that they were fully staffed. Wages and benefit costs rose moderately, with several contacts noting continued wage pressures.
Prices
Prices rose moderately in April and early May, and contacts expected a similar rate of increase over the next 12 months. Producer prices increased modestly, with contacts highlighting higher costs for some raw materials and for energy. However, several contacts said that growth in many raw materials prices had slowed. In addition, a number reported that increases in shipping costs had slowed noticeably, particularly for trucking and ocean freight. Consumer prices generally increased due to solid demand and the passthrough of higher costs. That said, a retail industry observer said price growth was moderating across categories.
Consumer Spending
Consumer spending was unchanged on balance over the reporting period. Nonauto retail sales were flat, as strong demand for essentials was offset by relatively weak spending on discretionary items. For example, contacts highlighted solid demand for groceries and household items, but lower sales of furniture and jewelry. Unseasonably cool weather reportedly hurt lawn and garden sales. Light vehicle sales increased slightly. Several vehicle dealers said that high prices were putting a damper on demand. Leisure and hospitality spending fell slightly—notably sales at restaurants were down—but overall activity remained at a high level, with contacts reporting strong spending on cruises and at travel agencies.
Business Spending
Business spending was little changed overall in April and early May. Capital expenditures increased slightly, with several contacts reporting purchases of new software. Transportation demand edged down, and one contact noted that truck freight activity had slowed enough that some trucking capacity was no longer on the road. Demand for industrial, commercial, and residential energy decreased slightly. Inventories for most retailers were a bit above desired levels. In manufacturing, inventories stayed slightly elevated, and many contacts indicated that they were no longer experiencing supply chain disruptions.
Construction and Real Estate
Construction and real estate activity declined modestly on balance over the reporting period. Residential construction activity was down modestly. Contacts reported that high interest rates had led some projects to be postponed or cancelled, and that while construction costs had fallen, the decline wasn't enough to offset higher financing costs. Contacts in the multifamily sector were more sanguine, noting that many projects were moving forward despite tighter financial conditions. Residential real estate activity decreased modestly. Prices and rents declined, and contacts said that the low inventory of homes for sale helped prevent larger declines. Nonresidential construction moved down slightly, though warehouse building remained a bright spot. Contacts also noted that school construction was robust, supported both by American Rescue Plan funding and the passage of state and local referendums. Commercial real estate activity decreased moderately, with contacts pointing to high interest rates as a key factor behind the slowdown. Prices and rents were down, and the availability of sublease space increased. However, there were reports of rising retail rents in some areas because of a lack of high-quality new construction.
Manufacturing
Manufacturing demand decreased modestly in April and early May. Manufacturing backlogs were down moderately, and inventories were slightly elevated. Contacts reported fewer supply chain problems, though some items were still difficult to find. Steel orders increased slightly. One contact noted that steel service center inventories were low, in part because high interest rates made it expensive to hold inventory. Fabricated metals orders were down modestly, with contacts pointing to the aerospace and construction sectors as reasons for the decline. Machinery sales were down slightly, and contacts also cited weaker demand from the aerospace sector. Auto production was steady on balance.
Banking and Finance
Financial conditions tightened modestly over the reporting period. Bond and equity market participants saw little change in asset values or volatility. Business loan demand was flat overall, though one banking contact noted that clients manufacturing or selling discretionary consumer items had increased their credit line utilization in response to lower demand. Loan quality deteriorated some, but a few contacts noted that delinquencies remained below pre-pandemic levels. Business lenders reported slightly tighter standards, while borrowers said that credit conditions had tightened moderately. In the consumer market, new loan demand decreased slightly, with contacts highlighting a slower mortgage market. Consumer loan quality was flat, while standards tightened slightly.
Agriculture
Expectations for Seventh District farm incomes in 2023 fell some as prices for key products moved lower. Corn and soybean prices decreased, as rapid fieldwork and planting progress heightened expectations for a large harvest. Soft red wheat prices remained weak, but hard wheat prices rose due to drought affecting much of the U.S. wheat crop and uncertainty surrounding another extension of the agreement allowing exports out of Ukraine. There were lower prices for eggs and dairy products, especially cheese. Hog prices increased from a low level and cattle prices moved higher. In light of higher interest rates, contacts expected farmers to conserve working capital to minimize the need to take out farm operating loans. There were reports of slower farm machinery sales but also shortages of some types of equipment. Prices for farmland were higher again as demand remained solid and inventories of farms for sale were limited.
Community Conditions
Community development organizations and public administrators reported a small increase in overall economic activity in April and early May. State government officials said tax revenue continued to grow but at a slower pace. Unemployment insurance claims remained low, though one contact noted a rise in claims from workers at temporary help firms. Demand for social services was elevated; contacts said that the need for food assistance had been exacerbated by the recent end of Covid-19 benefits. Tight labor market conditions were again a challenge for small businesses and community-serving organizations, as employees were reportedly willing to change jobs for modest increases in pay and were less swayed by benefit options. Elevated interest rates continued to be a factor limiting the supply of affordable housing.
For more information about District economic conditions visit: https://www.chicagofed.org/research/data/cfsec/current-data