Beige Book Report: Chicago
November 30, 2016
Growth in economic activity in the Seventh District slowed to a modest pace in October and early November, but contacts expect growth to return to a moderate pace over the next six to twelve months. While business spending and manufacturing production grew at moderate rates, consumer spending and construction and real estate activity increased only slightly. Financial conditions were little changed. Cost pressures increased modestly, but remained mild overall. Record crop yields implied that more farmers would break even this year than previously expected.
Consumer Spending
Consumer spending increased slightly over the reporting period, primarily reflecting gains at middle-market retailers. Contacts reported stronger sales in the furniture, building material, garden supply, and personal service segments, but weaker sales in the clothing, sporting goods, and restaurant segments. Sales of new light vehicles remained strong in the District, supported in part by increasingly aggressive incentives aimed at reducing inventories, which some dealers reported as approaching uncomfortable levels. Used light vehicle sales increased slightly, helped by lower prices resulting from a high number of new vehicles coming off lease.
Business Spending
Growth in business spending continued at a moderate pace in October and early November. Retailers (other than some auto dealers) generally indicated that inventories were at comfortable levels. Most manufacturers' inventories were at desired levels as well, though heavy machinery and truck producers reported that dealers' stocks were too high. Steel service center inventories remained below historical norms, but in alignment with slowing demand. Current capital expenditures continued to grow at a moderate pace, though contacts expected only modest growth in expenditures over the next six to twelve months. Outlays were primarily for replacing industrial and IT equipment. Employment growth remained moderate, and contacts expect little change in the rate of hiring over the next six to twelve months. Contacts continue to indicate that the labor market is tight and that it is getting more and more difficult to fill positions at any skill level. There were also reports of delayed construction projects because of difficulties in finding workers. A staffing firm again reported no change in billable hours and ongoing difficulty filling orders at the wages employers were willing to pay. Demand for electricity in the Chicago area was flat, but down slightly in the Detroit area, reflecting lower demand from industrial consumers. Shipping volumes increased slightly in the District.
Construction and Real Estate
On balance, construction and real estate activity increased slightly over the reporting period. Residential construction edged up, with growth concentrated in the single-family market and in urban locations. Home sales and prices increased slightly overall, though sales varied by price range: Demand was strong for homes priced under $250,000, modest in the $250,000 to $500,000 price range, and declining in the over $500,000 market. Demand for nonresidential construction grew little on balance, with increases in the industrial and office sectors offsetting declines in other markets. Commercial real estate activity edged up from an already robust pace, with contacts reporting gains across most segments. Commercial rents inched up, commercial vacancy rates again decreased slightly, and the availability of sublease space was little changed.
Manufacturing
Growth in manufacturing production continued at a moderate pace in October and early November, with strong increases in autos and aerospace (though slowing a bit again in autos) and modest gains overall among other industries. Steel demand fell some, pushing capacity utilization lower. Prices for foreign steel rose and imports declined, but the market share of imported steel remained above historical norms. Heavy machinery manufacturers again reported declining demand due to ongoing reductions in rental inventories at dealers, though there were reports that end-user demand was stabilizing. Sales of heavy trucks also declined, with contacts indicating that strong sales in 2015 had pulled forward some demand from 2016. Specialty metals manufacturers reported slight declines in their overall order books, as increases from strong industries such as aerospace were more than offset by declines from weaker sectors such as energy and heavy machinery. Manufacturers of construction materials and equipment again reported slow but steady increases in shipments, in line with the pace of improvement in construction.
Banking and Finance
On balance, financial conditions were little changed over the reporting period. Financial market participants noted that while U.S. Treasury bond yields were up after the U.S. elections, corporate bond spreads declined. Contacts also noted an increase in volatility, particularly in foreign exchange markets, where the dollar was near a thirteen-year high. There were numerous reports of businesses seeking to refinance loans in anticipation of future interest rate increases. Loan demand for middle-market businesses was little changed overall. Loan quality improved again from already high levels with the exception of lending to the agriculture, energy, and steel sectors. Household credit demand was unchanged overall. While mortgage originations and refinancing increased slightly, home equity loan originations declined. Loan demand for autos stayed strong, with customers continuing to migrate toward longer-term contracts. One contact noted that for many auto loans, the purpose was not to reduce monthly payments, but to increase loan size.
Prices and Costs
Cost pressures increased modestly in October and early November, but remained mild overall. Energy prices remained low, but industrial metals prices rallied, and steel prices rebounded a bit. Retail prices were little changed. Wage pressures were steady overall, with larger increases for high-skilled occupations than for low-skilled occupations, though a number of contacts reported increasing wages equally for all employees. Non-wage labor costs picked up some, with many contacts reporting healthcare cost increases.
Agriculture
Record corn and soybean yields, combined with stable corn prices and rising soybean prices, implied that more crop operations than previously expected would at least break even this year. However, some operations were unlikely to be able to cover their costs, resulting in further refinancing of loans and some asset sales. Government assistance based on poor 2015 farm revenues supplemented incomes in certain counties. Corn yields were high enough in some locales to exceed storage and transportation facilities' capacity, forcing some crop to be stored in the open air. Strong production levels for livestock products continued to boost supplies. Nonetheless, some prices seemed to have bottomed out: dairy, egg, and cattle prices were up modestly, whereas hog prices continued to fall.