Beige Book Report: Chicago
September 4, 2019
Summary of Economic Activity
Economic activity in the Seventh District increased slightly overall in July and early August, and contacts expected growth to continue at a similar pace over the next 12 months. Consumer spending increased modestly; employment and business spending increased slightly; and manufacturing and construction and real estate were little changed. Wages and prices rose slightly. Financial conditions were little changed on balance. Farm income prospects improved some, but remained poor for most agriculture sectors.
Employment and Wages
Employment increased slightly over the reporting period and contacts expected a similar-sized increase over the next 12 months. Hiring continued to be focused on professional and technical, sales, and production workers, with a noticeable increase in the number of contacts hiring professional and technical workers. As they have for some time, contacts indicated that the labor market was tight and that it was difficult to fill positions at all skill levels. A staffing firm reported little change in billable hours. Wages increased slightly overall. Contacts were most likely to report wage increases for professional and technical, administrative, and production workers. Many firms reported rising benefits costs.
Prices rose slightly in July and early August, though contacts expected prices to rise a bit faster over the next 12 months. Retail prices increased slightly. One contact said that the effect on retail prices of the scheduled new tariffs on Chinese imports wouldn't be felt until early 2020. In contrast, another contact reported that some retailers had already started implementing incremental price increases to avoid a single, noticeable increase when the tariffs came into effect. Producer prices rose slightly, with contacts reporting falling freight costs and slower increases in labor and materials costs.
Consumer spending increased at a modest pace over the reporting period. Nonauto retail sales were up modestly, with gains in the apparel and general merchandise sectors but declines in the furniture and building materials sectors. Contacts noted that malls and department stores continued to struggle. Back-to-school sales were meeting expectations, with reports of particularly good results for discount stores and big box supercenters. Sales of new and used light vehicles increased modestly.
Business spending increased slightly in July and early August. Retail inventories were generally at comfortable levels. One contact reported that a few apparel and big box retailers had ordered aggressively for the holiday shopping season but that most retailers were placing orders that were more conservative. Manufacturing inventories were somewhat elevated overall. Capital spending moved up slightly, and contacts expected that pace to continue over the next 12 months. Outlays were primarily for replacing industrial and IT equipment. There was a noticeable decline in the number of contacts reporting spending for renovating structures. Contacts continued to note that elevated uncertainty about the future state of the economy and international trade policy was holding back investment and spurring efforts to diversify supply chains. Demand for transportation services declined moderately. Commercial and industrial energy demand increased slightly, led by increases in manufacturing utilization.
Construction and Real Estate
Construction and real estate activity was little changed over the reporting period. Residential construction was flat, with increases in the multifamily sector offset by decreases in luxury single-family building. Residential real estate activity decreased modestly as tight inventories for starter homes continued to hold back sales. Contacts continued to report that it was unprofitable to build starter homes because of high costs. Contacts indicated that the effect of lower mortgage rates on home buying was weaker than usual. Nonresidential construction increased slightly, and one contact reported that bidding activity remained high. Like residential builders, nonresidential builders also noted that high costs were slowing the rate of construction. Commercial real estate activity was unchanged, with steady activity across most sectors. Rents ticked up, while vacancies and the availability of sublease space were flat.
Manufacturing production was little changed in July and early August, though contacts were generally satisfied with the level of activity. Steel demand increased slightly. Demand for heavy machinery declined some, though one contact expected orders to increase during the second half of the year, particularly from the mining industry. Specialty metals manufacturers reported a slight decline in orders, as decreased demand from the auto and heavy equipment industries was only partially offset by increased demand from the defense and aerospace industries. Orders for heavy trucks increased, though contacts expected demand to slow through the second half of the year. Manufacturers of construction materials reported a modest increase in shipments. Auto production was flat.
Banking and Finance
Financial conditions were little changed on balance over the reporting period. Financial market participants attributed lower equity and higher bond prices to greater uncertainty about the future state of the economy. Business loan demand rose modestly, with reports of increased equipment purchases and M&A activity but lower commercial real estate activity. Loan quality remained solid across most sectors. Contacts said that lending standards were little changed, but noted that strong competition was creating pressure to loosen them. Consumer loan demand increased slightly, with little change in loan quality or standards. There were reports of a small increase in mortgage refinancing due to lower interest rates.
Farm income prospects improved some, but remained poor for most agriculture sectors. Expectations for corn and soybean output improved some but were still much lower compared to a year ago, and the condition of crops was highly variable. Crop development was as much as a month behind normal because the wet spring delayed planting. Prices for corn and soybeans declined. Egg and dairy prices moved higher, while hog and cattle prices moved lower. Contacts noted that another round of payments from the Market Facilitation Program, along with other government programs, were helping to make up for low farm incomes.
For more information about District economic conditions visit: chicagofed.org/cfsbc