Beige Book Report: Chicago
October 19, 2016
Growth in economic activity in the Seventh District continued at a moderate pace in late August and September, and contacts expect growth to remain moderate over the next six to twelve months. Business spending and manufacturing production grew at a moderate rate, while consumer spending and construction and real estate activity increased slightly. Financial conditions were little changed. Cost pressures were little changed as well, remaining mild. Low expectations for farm incomes continued as the harvest began.
Consumer Spending
Growth in consumer spending increased only slightly over the reporting period, in spite of a further increase in promotional activity. Store traffic remained low. Contacts reported stronger sales in the furniture, home furnishings, and personal care segments, but weaker sales in the grocery, clothing, and sporting and leisure goods segments. Most contacts continued to expect a slightly slower pace of holiday sales compared with last year. The tourism industry continued to perform well, with a slight increase in already high occupancy rates. The sales pace of autos in the District remained strong, but slowed slightly despite higher incentives. A number of dealers said that they believe pent-up demand from the Great Recession is now fully satisfied. Used vehicle sales volumes were flat.
Business Spending
Growth in business spending remained at a moderate pace in late August and September. Retailers largely indicated that inventories were at comfortable levels. One contact noted that the bankruptcy of South Korean shipping company Hanjin (which left $14 billion of cargo stranded at sea due to inability to pay port fees) should have limited effects on retail inventories. Manufacturing inventories were generally at desired levels. Steel service center inventories were below historical norms, but a contacted noted that this was likely intentional because growth in steel demand has slowed. Current capital expenditures continued to grow at a moderate pace, as did expectations for future spending. Outlays were primarily for replacing industrial and IT equipment. Hiring picked up to a moderate rate, and contacts expect hiring to continue at a moderate rate over the next six to twelve months. Many contacts noted that the labor market continues to tighten. Demand remained strong for skilled workers, particularly for many professional and technical occupations, sales, and skilled manufacturing and building trades. Contacts also indicated that competition continued to grow for lower-skilled workers. A staffing firm again reported no change in billable hours and ongoing difficulty filling orders at the wages employers were willing to pay. The firm noted that turnover rates were high. It also reported an increase in drug test failures relative to a year ago among potential employees. Demand for electricity increased slightly in the Chicago area, led by an influx of large industrial customers, while demand for electricity fell slightly in the Detroit area. Shipping volumes again declined slightly, though there were early signs that shipments of energy products were beginning to rebound.
Construction and Real Estate
Construction and real estate activity increased modestly over the reporting period. Residential construction was little changed overall, with growth in the single-family segment in suburban locations offset by declines in other markets. Home sales and prices increased slightly overall, though sales varied by price range: There was strong demand for homes priced under $500,000, while the sales pace slowed for homes priced over $500,000. Demand for nonresidential construction increased slightly, with growth concentrated in industrial construction. Commercial real estate activity remained robust and was up slightly, with contacts reporting gains in both the for-sale and for-lease segments. Commercial rents edged up, and vacancy rates and the availability of sublease space decreased slightly.
Manufacturing
Growth in manufacturing production continued at a moderate pace in late August and September. Growth continued to be strong in autos and aerospace (though it slowed a bit in autos) while gains remained modest overall among other industries. Growth in steel demand slowed some and remained modest. Heavy machinery manufacturers again reported declines in demand resulting from slower increases in construction and a significant cutback in dealers' inventories. Demand for heavy trucks grew slightly. Specialty metals manufacturers reported little change in their order books on balance, with slight slowdowns for stronger industries such as autos and slight pickups for weaker industries such as energy. Manufacturers of construction materials again reported slow but steady increases in shipments, in line with the modest pace of improvement in construction. A manufacturer of audio equipment reported strong growth.
Banking and Finance
Financial conditions changed little over the reporting period. Financial market participants noted a slight decline in equity prices and low levels of volatility. A contact indicated that impending regulatory changes for institutional money market mutual funds continued to result in large withdrawals from the funds, further pushing up short term interbank lending rates. Loan demand from small and middle market businesses continued to rise, with one contact pointing to an increase in hiring of "relationship managers" as a sign of growth. Multiple contacts reported growth in commercial and industrial loan demand, but noted that it was the result of increasing M&A activity, not increasing capital expenditures. Contacts also indicated that commercial and industrial loan pricing was competitive, and that asset quality improved some. Commercial real estate loan demand was robust and steady, though contacts worried that the market was overheating. Consumer loan demand increased modestly. Residential mortgage volumes were solid, but little changed, and contacts reported competitive pricing and improving quality. Auto loan volumes were robust and the pace picked up some. Contacts also reported an increase in credit card loan losses and slower increases in personal loan volume.
Prices and Costs
Cost pressures were little changed on balance, remaining mild in late August and September. Most energy and metals prices were flat and stayed low, though steel prices fell some. Retail prices changed little on balance, though deflationary pressures strengthened for produce and meat and dairy products. Wage pressures were steady overall, with larger increases for high-skilled occupations than for low-skilled occupations. That said, a number of firms reported increasing wages equally across the board. Non-wage labor costs picked up some, with a greater number of contacts reporting increases in healthcare costs.
Agriculture
Low expectations for farm incomes continued over the reporting period. The consensus among contacts was that for most farms a profitable soybean harvest would not be enough to offset an unprofitable corn harvest. Corn prices were unchanged and lower than last year; while soybean prices moved down again, they remained higher than last year. Both the corn and soybean crops were still on track to set records for the District, although problems with disease lowered yield expectations for corn a bit. Even though crops were more mature than normal in late September, harvesting was behind its typical pace because above-average precipitation slowed field work. Milk prices were up some, but only enough to "slow the bleeding" for most producers. Hog and cattle prices were lower once again, as meat supplies have continued to build.