Beige Book Report: Chicago
January 16, 2019
Summary of Economic Activity
Economic activity in the Seventh District grew at a modest pace in late November and December, and contacts expected growth to continue at that pace over the next 6 to 12 months. Employment, consumer spending, and business spending increased modestly; manufacturing increased slightly; and construction and real estate activity was little changed. Wages and prices rose modestly and financial conditions deteriorated slightly. Prospects for farm income improved as corn, soybean, and wheat prices moved higher.
Employment and Wages
Employment growth continued at a modest pace over the reporting period and contacts expected job gains to continue at that rate over the next 6 to 12 months. Hiring was focused on production and professional and technical workers, while there was a decline in the number of contacts planning to hire sales workers. As they have for some time, contacts indicated that the labor market was tight and that they had difficulty filling positions at all skill levels. A staffing firm that primarily supplies manufacturers with production workers reported continued difficulty in filling orders and no change in billable hours. Wage growth remained modest overall. Contacts were most likely to report wage increases for managerial, professional and technical, and administrative workers. Multiple manufacturing contacts reported that rising wages for entry-level positions was leading them to invest in automation that would increase these workers' productivity and justify the higher wages. Many firms reported growing benefits costs.
Prices rose modestly in late November and December, and contacts expected prices to continue to increase at that rate over the next 6 to 12 months. Retail prices increased slightly overall. Producer prices again rose moderately, reflecting in part the pass-through of higher labor, materials, and freight costs.
Consumer spending rose modestly over the reporting period. Nonauto retail sales increased at a moderate pace, as contacts reported solid holiday sales and widespread gains across sales categories. Contacts also highlighted significant growth in the travel and personal service sectors. Light vehicle sales were flat and slightly under dealers' expectations for the reporting period. Some contacts attributed the slower-than-expected vehicle sales to rising interest rates and declines in the stock market.
Business spending increased modestly in late November and December. Retail contacts said that inventories were generally at comfortable levels. Most manufacturing contacts also reported that stocks were at comfortable levels, though steel service center inventories remained below historical norms and one steel consumer reported cutting back their own production because of steel input shortages. Capital spending increased modestly and contacts expected growth to continue at that pace over the next 6 to 12 months. Outlays were primarily for replacing industrial and IT equipment and for renovating structures. Energy demand from commercial and industrial users increased modestly, led by greater consumption by data centers and manufacturers. Demand for transportation services also increased modestly from an already strong level.
Construction and Real Estate
Construction and real estate activity was little changed over the reporting period. Residential construction increased slightly, with growth concentrated in the suburban single-family market. Nonresidential construction was little changed on balance, with reports of increased activity in the industrial and infrastructure sectors offset by declines elsewhere. Home sales were flat overall, though one contact in the Detroit area reported a moderate decline in sales, particularly for homes under $250,000. Home prices and residential rents increased slightly. Commercial real estate activity was little changed, though the pace remained strong. Vacancy rates, sublease space, and rents were little changed.
Growth in manufacturing production slowed in late November and December, with contacts reporting only a slight increase in output. That said, most contacts were pleased with the level of production. Demand for steel increased, but at a slower rate than earlier in the year. Steel imports continued to decline. Demand for heavy machinery increased moderately, with growth spread across the construction, transportation, and energy sectors. Demand for heavy trucks increased slightly from an already strong level. Specialty metals manufacturers reported modest increases in order books, with contacts highlighting growth in the medical devices, aerospace, and defense sectors. Auto production declined slightly, but remained at a solid level.
Banking and Finance
Financial conditions deteriorated slightly overall during the reporting period. Financial market participants noted substantial declines in equities prices and increased volatility. Business loan demand increased modestly, with contacts highlighting growth in the construction, manufacturing, and transportation sectors. Loan quality and lending standards were little changed. Consumer loan demand increased slightly, supported by increased auto lending. Consumer loan quality and lending standards were little changed. Demand for consumer insurance was also little changed.
Prices for corn, soybeans, and wheat moved higher over the reporting period, supported in part by news that trade talks between the U.S. and China had resumed and that China had purchased some U.S. soybeans. A second round of payments from the Federal Government's Market Facilitation Program also supported farm incomes (primarily for soybean producers), although payments have been disrupted by the government shutdown. The shutdown also slowed the release of government reports on agricultural market conditions, leading to greater uncertainty for market participants. Contacts noted that the profitability of the 2018 harvest was still unclear as a large amount of the harvest remained unsold. Lower ethanol prices weighed on ethanol producers, and there were reports of plant closures as well as expectations of more closures in the future. Cattle, egg, and dairy prices all rose, though dairies generally continued to face difficult operating conditions. Hog prices fell over the reporting period. Contacts noted that rising input prices for crop and livestock producers as well as higher interest rates were shrinking margins.
For more information about District economic conditions visit: chicagofed.org/cfsbc