January 18, 2023
Summary of Economic Activity
Economic activity in the Seventh District decreased slightly overall in late November and December. Contacts generally expected slow growth in the coming months, though many expressed concerns about the potential for a recession this year. Employment increased moderately; consumer and business spending were unchanged; nonbusiness contacts saw little change in activity; manufacturing decreased modestly; and construction and real estate decreased moderately. Many contacts indicated they were no longer facing supply chain disruptions. Prices and wages rose moderately, though at a slower pace than last report, while financial conditions tightened some. Agriculture incomes were strong in 2022.
Labor Markets
Employment increased moderately in late November and December, and contacts expected a modest increase in employment over the next 12 months. Many contacts continued to report difficulty finding workers, though others said they were able to meet their hiring needs. One contact noted that worker attrition had slowed. Another said that offering longer but fewer shifts had attracted workers and helped those with childcare needs. Wage and benefit costs continued to increase, though at a slower pace than in the prior reporting period. Compensation increases were aimed both at attracting new workers and retaining existing talent.
Prices
Prices rose moderately in late November and December, which was a slower pace of increase than in the last report. Contacts expected a similar rate of price increases over the next 12 months. Producer prices rose moderately, with reports of higher overall energy and raw materials costs. One contact noted that shipping costs had largely stabilized, and another reported that declining fuel prices were lowering production costs. Consumer prices generally moved up due to solid demand and passthrough of higher costs, though there was growing consumer resistance to paying higher prices.
Consumer Spending
Consumer spending was little changed on balance. Nonauto retail sales for the holiday season edged up, slightly exceeding expectations. Categories that registered growth included consumer electronics, grocery, discount stores, cell phone plans, and specialized goods such as formal apparel and small kitchen appliances. Weaker spending categories included furniture and toys. Retailers increased promotions prior to Christmas and boosted them further after Christmas to sell off excess inventories. New vehicle sales were little changed, and dealers were concerned that rising inventories and financing rates would hurt profitability. Used vehicle sales decreased slightly, and prices continued their fall from peak levels earlier in 2022. Overall, leisure and hospitality spending was up a bit, while some airlines and cruise lines noted that the level of spending was well above last year's. Movie ticket sales were also up.
Business Spending
Business spending was little changed overall in late November and December. Capital expenditures remained stable on balance, with contacts highlighting purchases aimed at greater automation. Demand for commercial and industrial energy decreased slightly while residential energy consumption rose. Retail inventories remained elevated overall, and contacts said retailers were reducing orders and ramping up promotions to help pare them down. Vehicle inventory levels continued their slow and steady climb. In manufacturing, inventories were somewhat elevated, as supply issues continued to lead firms to hold unfinished products. That said, many contacts indicated they were no longer experiencing supply chain disruptions.
Construction and Real Estate
Construction and real estate activity decreased moderately over the reporting period. Residential construction activity declined modestly overall, led by a pullback in single family homebuilding. Contacts reported that multifamily construction and remodeling activity were stable. Residential real estate activity fell moderately. Home prices moved down modestly, but rents were up modestly. Nonresidential construction declined slightly. One contact said that while there is still work in the pipeline for the next 6 to 12 months, high interest rates were weighing on new projects, leading to worries that work will dry up later in 2023. Commercial real estate activity decreased moderately, with contacts reporting that obtaining financing for deals was very difficult. Prices were down moderately, while rents decreased modestly. Both vacancy rates and the availability of sublease space increased modestly.
Manufacturing
Manufacturing demand decreased modestly in late November and December. Contacts reported improvements in the availability of inputs, which helped them further reduce order backlogs. Steel production declined slightly in November as demand slowed. Fabricated metals demand was flat on balance, with contacts highlighting growth in defense industry sales but declining orders from the housing and automotive sectors. Several fabricated metals contacts noted long lead times for copper. Auto production decreased slightly, while heavy truck demand increased slightly. Heavy machinery orders were steady.
Banking and Finance
Financial conditions tightened some over the reporting period. Participants in the equity and bond markets reported lower asset values and increased volatility. Business loan demand fell moderately, with contacts pointing to declines in commercial real estate lending. Business loan quality decreased slightly, though one contact noted that loan quality remained strong in multifamily housing as rents stayed high. Business loan standards tightened slightly. Consumer loan volumes fell modestly, with contacts continuing to note declines in mortgage lending in the face of higher rates. Consumer loan quality and standards remained the same.
Agriculture
After a strong year for District agricultural income, contacts expected lower but still solid returns in 2023. A contact suggested that many farmers will spend their gains on equipment and trucks, especially as availability at dealers had improved. With rivers rising, barge shipments returned closer to normal levels, easing shipping costs some. Furthermore, prices for inputs such as fertilizers, chemicals, and energy all moved down during the reporting period, and there was less concern about the availability of inputs. However, some contacts expressed worries about higher interest rates on farm loans. Soybean prices were higher, whereas corn prices were little changed. Egg and cattle prices continued moving up, while dairy and hog prices generally continued to move down. Most major agricultural prices ended 2022 higher than they were at the end of 2021.
Community Conditions
Community development organizations and public administrators reported little change in overall economic activity in late November and December. State government officials saw healthy growth in tax revenues over the reporting period. Demand for unemployment insurance remained low. Small business support organizations said clients continued to face margin pressures due to rising input costs, leading to increased loan delinquencies. In addition, higher interest rates were making small businesses reluctant to take on working capital loans. Nonprofit organizations said that uncertainty about the employment outlook was complicating low- and moderate-income households' long-term financial decisions, such as whether to pursue homeownership. Philanthropic organizations continued to face the challenge of balancing increased requests to address basic needs—such as food insecurity—with lower revenues.
For more information about District economic conditions visit: https://www.chicagofed.org/research/data/cfsec/current-data