March 4, 2020
Summary of Economic Activity
Economic activity in the Seventh District increased modestly overall in January and early February, and contacts expected growth to continue at a similar pace over the next 12 months. Consumer spending and employment increased modestly, while construction and real estate activity increased slightly. Business spending and manufacturing production were little changed. Wages increased modestly, prices increased slightly, and financial conditions were unchanged. The outlook for crop farmers’ incomes deteriorated some. Few contacts indicated that the coronavirus outbreak had affected their business operations to date, but there were concerns about supply chain issues going forward.
Employment and Wages
Employment increased modestly over the reporting period, but contacts expected a slightly faster rate of growth over the next 12 months. Hiring was focused on professional and technical workers and managerial 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. Manufacturers facing slow demand again reported cutting hours rather than laying off workers because they were worried the tight labor market would make it too difficult to hire when demand recovered. A staffing firm that primarily supplies manufacturers with production workers reported no change in billable hours. Wage growth increased modestly overall, and contacts expected a similar growth rate over the next 12 months. Contacts reported wage increases across most occupations, with multiple contacts again highlighting growing wage pressures for entry-level workers. Benefit costs increased slightly.
Prices
Prices increased slightly on balance in January and early February, and contacts expected prices to rise modestly over the next 12 months. Retail prices ticked up, and one contact noted that retailer margins had tightened some, largely due to higher shipping costs. There were again reports of an increase in grocery price inflation. Producer prices were flat. Contacts indicated little change in producers’ input costs on net; for example, one said that increased shipping costs had offset decreased raw materials costs.
Consumer Spending
Consumer spending increased modestly over the reporting period, and contacts expected a similar pace of growth over the next 12 months. Nonauto retail sales rose modestly, led by gains in the grocery, apparel, and general merchandise sectors. Contacts again reported solid growth in e-commerce and slow growth for brick and mortar general merchandise stores. New light vehicle sales were flat, while sales of used light vehicles moved higher and leasing activity remained robust.
Business Spending
Business spending was little changed in January and early February. Retail inventories were generally comfortable, though GM dealers indicated that inventories were still not fully replenished following the run-offs that occurred during the UAW strike. Most manufacturers said that inventories were at comfortable levels. Some manufacturing contacts reported low inventories of inputs produced in China due to disruptions from the coronavirus outbreak; while most said the impact had been minimal so far, many expected a larger effect if the disruptions continued much longer. Similarly, one retail industry contact believed that if not resolved soon, the outbreak could affect inventories in the sector during the second half of 2020. Capital spending declined some, though contacts expected spending to increase modestly over the next 12 months. Outlays were primarily for intellectual property and IT equipment. About half of contacts reported that their newly purchased capital was intended to increase capacity. Demand for transportation services was little changed, though there were reports of decreased international trade related to the coronavirus. Energy consumption was slightly lower for both commercial and industrial users, with reports of weakness in manufacturing, particularly in the auto sector.
Construction and Real Estate
Construction and real estate activity increased slightly overall over the reporting period. Residential construction edged up across all price segments. Contacts in southeast Michigan noted that the price gap between new and existing homes continued to widen. Residential real estate activity increased modestly, with growth primarily coming from homes at low to moderate price points. Home prices and rents moved up modestly. Nonresidential construction increased slightly. Contacts again indicated that rising costs were holding back growth, emphasizing a shortage of skilled workers and rising land development costs. Commercial real estate activity ticked up, led by the office and industrial sectors. Contacts noted that new office space absorption rates had slowed, but remained healthy. In contrast, the retail sector continued to struggle. Overall, commercial rents were unchanged, while vacancies and the availability of sublease space edged up.
Manufacturing
Manufacturing production was little changed overall in January and early February. Auto production was unchanged, but continued at a solid level. Steel production also was flat. Heavy machinery demand decreased overall, as a slowdown in demand in China—apparently due to the coronavirus—more than offset robust demand in the US. Heavy truck demand decreased, but contacts expected a turnaround in growth as the year progressed. Specialty metals orders were flat overall, with reports of lower sales to the auto and aerospace industries. Manufacturers of construction materials reported a slight increase in shipments, in line with growth in home building.
Banking and Finance
Financial conditions were unchanged over the reporting period. Participants in the equity and bond markets reported little change in conditions on balance, citing the positive impact of low interest rates but the negative impact of the coronavirus outbreak. Business loan demand increased slightly overall. Contacts reported increased volumes in the commercial real estate, trucking, construction, and auto sectors, though some of the increase appeared to reflect greater borrowing needs due to lower revenues. Loan quality was little changed overall, though one contact said that the warm winter had led to greater delinquencies for natural gas producers. Lending standards were generally unchanged. Consumer loan demand increased modestly, led by growth in mortgage volumes for home purchases and refinancing; loan quality and standards were little changed.
Agriculture
The outlook for crop farmers’ incomes deteriorated some in January and early February. Corn and soybean prices moved lower, though they remained higher than a year ago. There were reports of farmers holding onto their stocks of crops with hopes of higher prices later in the year. Contacts expressed frustration that Chinese purchases of US agricultural goods had not yet materialized following the announcement of the Phase One trade deal and were concerned that the coronavirus outbreak would be used as an excuse for missing future trade targets. Contacts reported that the Market Facilitation Program was providing crucial income support to cushion the effects of the trade challenges with China and poor 2019 yields in much of the District. Milk and hog prices were down over the reporting period but were up compared to a year ago. Egg prices rebounded some, but cattle prices moved lower.
For more information about District economic conditions visit: chicagofed.org/cfsbc