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Beige Book Report: Chicago

March 7, 2018

Summary of Economic Activity
Growth in economic activity in the Seventh District remained at a moderate pace in January and early February, and contacts expected growth to continue at that pace over the next 6 to 12 months. Employment and manufacturing production increased moderately, business spending rose modestly, construction and real estate activity grew slightly, and consumer spending was down slightly. Wages increased modestly, prices rose slightly, and financial conditions deteriorated some, on balance. Expectations for overall farm income in 2018 improved somewhat, though farmers continued to face challenging conditions.

Employment and Wages
Employment increased at a moderate pace over the reporting period, and contacts expected gains to continue at this rate over the next 6 to 12 months. As they have for some time, contacts indicated that the labor market was tight and reported difficulties filling positions at all skill levels. Hiring was focused on professional and technical, production, and sales workers, though there was a notable pickup in the number of firms looking to hire administrative workers. In addition, a staffing firm that primarily supplies manufacturers with production workers reported an increase in billable hours. Wage growth remained modest overall, though the number of contacts who reported pay increases for management and production workers was higher than a few months ago. In addition, most firms reported increasing benefits costs.

Overall, prices again rose slightly in January and early February, though more contacts now expect the rate of increase to pick up over the next 6 to 12 months. Retail prices increased slightly overall. Producer prices also rose slightly, reflecting in part the pass-through of higher raw materials and freight costs. There was a decline in the number of contacts reporting increased tax and regulatory costs.

Consumer Spending
Consumer spending was down slightly over the reporting period. Non-auto retail sales were flat on balance: gains in the electronics and appliance, building and gardening, entertainment, and health and personal care segments were offset by declines in the furniture, apparel, and grocery segments. Contacts continued to report strong e-commerce growth. New light vehicle sales volumes were down a bit, with flat sales in January and lower sales in early February. A number of dealers suggested that stock market volatility led potential customers to delay vehicle purchases. Despite the slow start to the year, contacts generally believed total light vehicle sales for 2018 would be similar to those for 2017. Used vehicle sales remained flat, and the vehicle mix for new and used vehicles continued to shift from cars to light trucks. Demand for residential energy increased moderately.

Business Spending
Business spending increased modestly in January and early February. Retail and manufacturing contacts indicated that inventories were generally at comfortable levels. Capital spending increased modestly, though contacts expected moderate growth over the next 6 to 12 months. Outlays were primarily for replacing industrial and IT equipment and for renovating structures. Demand for commercial and industrial energy increased slightly, and transportation demand increased moderately.

Construction and Real Estate
Construction and real estate activity ticked up over the reporting period. Residential construction rose modestly, and contacts expected activity to increase moderately over the next 6 to 12 months. With rising costs squeezing margins, contacts noted that homebuilders were focusing on the construction of high-price, high-margin housing. Overall, home sales were up slightly: sales of starter homes increased in spite of low inventories, while sales of high-end homes were flat and inventories ample. Home prices rose slightly, with stronger increases in the starter home segment. Nonresidential construction edged lower on balance, though building is expected to increase modestly going forward. Commercial real estate activity increased slightly from an already strong level, and contacts expected activity to increase slightly further over the next 6 to 12 months. Commercial rents rose slightly as vacancy rates decreased, and the availability of sublease space was little changed.

Growth in manufacturing production continued at a moderate rate in January and early February. Steel production increased at a moderate pace in response to solid end-user demand and the rebuilding of inventories at steel service centers. Demand for heavy machinery also increased moderately as mining and construction activity continued to grow. Demand for heavy trucks was strong. Order books for specialty metals manufacturers increased moderately: growth was spread across a wide variety of sectors, with particularly strong demand from the oil and gas, aerospace, and transportation sectors. Manufacturers of construction materials continued to report slow but steady increases in shipments, in line with the pace of improvement in construction. Auto production was flat, but remained at a solid level.

Banking and Finance
Financial conditions deteriorated some on balance over the reporting period. Financial market participants noted falling equity prices, rising interest rates, and an increase in volatility. Small and medium business loan demand increased slightly, with growth coming primarily from small businesses. While competition remained strong, contacts reported little change in lending standards or loan quality. Consumer loan volume was little changed overall, though one contact noted a significant increase in demand for home equity loans since the start of the year. Consumer loan quality and lending standards were little changed.

Expectations for overall farm income in 2018 improved somewhat in January and early February, though much of the District's farm sector remained under stress. There were reports of more small tracts of ground being offered for sale. Corn and soybean prices were up enough to cover a slight rise in projected production costs for 2018. Soybeans remained more profitable than corn for most operations--one contact predicted that the split of corn and soybean acres planted this spring will be close to even (corn has consistently comprised the larger share). Contacts noted that subsoil moisture was very depleted in many areas because of drought conditions last year, making timely spring and summer rains more important for crop health this coming growing season. Hog, cattle, and egg prices were higher, but dairy prices lagged, leading to an increase in the number of liquidations of diary operations.

For more information about District economic conditions visit: chicagofed.org/cfsbc