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Beige Book Report: Chicago

October 16, 2019

Summary of Economic Activity
Economic activity in the Seventh District increased slightly overall in late August and September, and contacts expected growth to continue at a similar pace over the next 12 months. Employment, consumer spending, business spending, and construction and real estate all increased slightly. Manufacturing production declined a bit. Wages and prices rose slightly and financial conditions improved modestly. The crop harvest got off to a slow start, as rains delayed fieldwork.

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. 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. One auto supplier facing a decline in sales due to the GM strike planned to cut workers' hours rather than making layoffs because he felt that in the tight labor market, it would be too difficult to find new workers after the strike ended. 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 late August and September, though contacts expected prices to rise somewhat faster over the next 12 months. Retail prices moved up slightly, with reports of increases related to both realized and potentially higher tariffs. Producer prices edged up, with contacts reporting stable freight costs and slower increases in labor and materials costs.

Consumer Spending
Consumer spending increased slightly on balance over the reporting period. Nonauto retail sales moved up a bit, with reports of gains in the appliances, outdoor, and lawn and garden sectors, but declines in apparel. Contacts expected holiday spending to be similar to or slightly higher than last year. Contacts reported lower tourism volumes. New light vehicle sales increased at a moderate pace and dealers reported that margins on new vehicles continued to shrink. Used vehicle sales remained at a strong level, surprising some dealers. Contacts said that the strike at GM hadn't yet hurt new vehicle sales, but believed that it would if the strike continued into November. The strike had created parts shortages though, which resulted in extended wait times for some repairs. In addition, there were reports of dealers providing only basic services for GM vehicles such as oil changes and tire rotations.

Business Spending
Business spending increased slightly in late August and September. Retail inventories were a little high overall, with reports that sales of fall merchandise were below expectations. Contacts said that the strike at GM was slowly depleting inventories of GM vehicles, but that inventories at GM suppliers were expected to keep growing until the strike ends. Most manufacturers reported comfortable inventory levels, though there were reports of shortages of stainless steel. 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 and renovating structures. Contacts continued to note that elevated uncertainty about international trade policy was holding back investment and spurring efforts to diversify supply chains. Demand for transportation services declined modestly. Commercial and industrial energy demand was little changed, with increases in commercial consumption offset by declines in industrial consumption.

Construction and Real Estate
Construction and real estate activity increased slightly over the reporting period. Residential construction rose modestly, with increased starter home construction outweighing lower high-end homebuilding. Contacts indicated that rising costs continued to put a damper on building. Residential real estate activity was little changed on balance, with higher sales of low- and moderately-priced homes offset by fewer sales of high-priced homes. Overall, home values rose slightly. Nonresidential construction activity was little changed. Nonresidential builders also noted that rising costs were slowing activity. Commercial real estate activity increased slightly. Contacts reported that demand from investors for buildings with tenants already in place continued to be strong. Rents, vacancies, and the availability of sublease space were little changed.

Manufacturing production decreased slightly in late August and September. Demand in the automotive industry decreased some, but remained at a solid level. Contacts noted that the halt in production at GM plants due to the strike was starting to affect auto suppliers' order books. Demand for steel decreased slightly. Heavy machinery manufacturers also reported a slight drop in orders, led by declines in demand from the oil and gas sector. Orders fell for specialty metals manufacturers as well, driven by decreased demand from the auto industry. Demand for heavy trucks increased, though contacts expected demand to slow through the rest of the year.

Banking and Finance
Overall, financial conditions improved modestly over the reporting period. Participants in the equity and bond markets reported a slight improvement in conditions. Business loan demand rose modestly, with growth spread across sectors. There were numerous reports of increased refinancing volumes for commercial real estate loans. Loan quality remained solid across most sectors. Contacts again said that lending standards were little changed, but noted that strong competition was creating pressure to loosen them. Consumer loan demand increased modestly, with reports of higher mortgage refinancing and home purchasing volumes. Loan quality and standards were little changed.

The corn and soybean harvest got off to a slow start in the District, as rains delayed fieldwork. In addition, the harvest started later than usual because heavy spring rains had delayed planting and crops were up to a month behind in maturity. Contacts had mounting concerns about how much of this year's crop would be able to fully mature before a hard frost hits. Overall, contacts expected the harvest to be well below those of recent years. Corn and soybean prices moved higher, especially toward the end of the reporting period. Egg and dairy prices were up, but hog and cattle prices drifted down. Contacts noted that although there was still uncertainty about the size of China's purchases of agricultural products, there was positive news for farmers in the newly announced trade deal with Japan and in recent adjustments to the implementation of the Renewable Fuels Standard that will support demand for biofuels.

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