Beige Book Report: Chicago
September 7, 2022
Summary of Economic Activity
Economic activity in the Seventh District decreased modestly overall in July and early August. Contacts expected slow growth in the coming months, with many expressing concerns about the potential for a recession. Employment increased moderately, business spending was little changed, consumer spending and construction and real estate declined modestly, and manufacturing orders were down moderately. Wages rose rapidly, as did most prices, while financial conditions improved modestly. Agriculture income expectations for 2022 were unchanged. Nonbusiness contacts reported little change in economic activity.
Labor Markets
Employment increased moderately over the reporting period, and contacts expected a similar pace of growth over the next 12 months. Many contacts continued to report difficulty in finding workers across sectors and skill levels. One contact in construction said they had rushed completion of a restaurant in time for a local festival, but the restaurant couldn't open because of lack of staff. Still, a number of contacts said finding workers had become easier. In addition, a workforce development agency saw an increase in the number of people coming in for job placement assistance or to apply for unemployment insurance benefits. Overall, wage and benefit costs increased rapidly and were aimed both at attracting new workers and retaining existing talent. In addition to labor market tightness, contacts cited high inflation as an impetus for workers requesting wage increases.
Prices
Most prices rose rapidly in July and early August, though energy prices decreased. Contacts expected the pace of price increases to slow over the next 12 months. Aside from a decline in energy costs, producer prices continued to rise, spurred by passthrough of higher costs for raw materials, labor, and shipping. However, growth in raw materials prices continued to slow, with contacts highlighting lower steel prices. Consumer prices generally moved up robustly (apart from declines in fuel prices) due to solid demand levels and passthrough of higher costs.
Consumer Spending
Consumer spending decreased modestly over the reporting period. Contacts noted that unit-sales of goods had fallen and that leisure and hospitality spending declined, albeit from a strong level earlier in the summer. Consumers continued to shift their spending toward essential items. Grocery contacts noted that trading down picked up across income levels—lower income shoppers moved to store brands over name brands while higher income shoppers shifted toward prepared foods from eating out. Contacts expected a slight increase in back-to-school sales over last year. Light vehicle sales were unchanged at a low level, although dealers indicated that pre-orders of new vehicles stayed robust.
Business Spending
Business spending was little changed on balance in July and early August. Retail inventories were elevated overall, and contacts expected to see increased price promotions for the rest of the year to help pare them down. Auto inventories increased slightly from their pandemic lows. In manufacturing, inventories were moderately elevated, as contacts reported building up "just-in-case" stocks of available inputs while also holding on to nearly completed products as they waited for missing parts to arrive. Retail and manufacturing contacts expected various inventory challenges to persist into 2023. Transportation services activity decreased slightly as greater congestion in the rail system slowed container movement. Capital expenditures increased modestly, with contacts highlighting purchases of new equipment, including machinery and vehicles. Commercial, residential, and industrial energy consumption was up slightly.
Construction and Real Estate
Construction and real estate activity decreased modestly overall. Residential construction pulled back slightly, and homebuilders expected a further decline in coming months. Residential real estate activity decreased moderately. Contacts noted that the number of offers homes typically received had fallen and that it was taking longer for them to sell. Home price growth slowed but remained positive. Rents were up modestly. Nonresidential construction decreased slightly, as contacts continued to report project delays and elevated costs. Commercial real estate activity also fell slightly, with contacts highlighting some cooling in the strong demand for industrial space. There were concerns about the ability of owners of multifamily properties to repay floating interest rate loans that were underwritten with large forecasted rent increases. Prices and rents fell slightly, as did vacancy rates.
Manufacturing
Manufacturing demand was down moderately in July and early August. Contacts again reported that with slowing new orders they were making headway in filling their large backlog of unfilled orders. Still, one contact indicated that at many manufacturers, current backlogs were large enough to sustain production levels through the end of the year. Output continued to be held back by difficulties with labor availability and supply chains. Steel demand decreased modestly, with one contact noting a decline in construction demand. There was a moderate fall in orders of fabricated metals, led by declines in demand from the transportation sector. Auto production was little changed, as shortages of microchips and other materials persisted. One contact said there is growing recognition in the auto industry that the microchip shortage would continue well into 2023. Heavy truck demand increased slightly, while inventories continue to be very low. Demand for heavy machinery was flat.
Banking and Finance
Financial conditions improved modestly over the reporting period. Participants in the equity and bond markets reported net increases in asset values and somewhat lower volatility. Business loan demand slowed slightly overall, with contacts pointing to higher borrowing rates and elevated uncertainty as contributing to the slowdown. Business loan quality remained very strong, though one contact said they were planning for some weakening in the coming months. Business loan standards tightened some. In consumer markets, loan volumes decreased modestly, with contacts continuing to note large declines in mortgage lending in the face of higher interest rates. Consumer loan quality was strong and stable, while standards tightened a bit.
Agriculture
Agricultural income prospects for 2022 were little changed, with contacts continuing to expect that most producers would turn a profit this year. Although portions of the District were in drought, farms were generally expected to have at least average yields for corn and soybeans. Crop progress was behind the typical pace due to late plantings but was catching up. Corn, soybean, and wheat prices were down from the previous reporting period, as were prices for milk and eggs. Hog prices declined slightly from a high level, while cattle prices edged up. Strong demand for agricultural equipment continued, with long lead times for delivery.
Community Conditions
Community development organizations and public administrators reported little change in overall economic activity, although inflation was creating financial challenges for some organizations and their clients. State government officials saw healthy growth in tax revenues over the reporting period. Small business development organizations noted their manufacturing clients' large order backlogs would take time to clear because of labor and supply chain constraints. Small business investment demand waned some due to higher interest rates and elevated economic uncertainty. Nonprofits assisting low- and moderate-income households indicated that higher prices for fuel, food, and housing were straining household budgets and leading to strong demand for their services. Nonprofits also noted financial challenges, as their funding was unable to keep up with rising staff wages.
For more information about District economic conditions visit: chicagofed.org/cfsec