July 12, 2023
Summary of Economic Activity
Economic activity in the Seventh District was little changed overall in late May and June. Contacts generally expected a small decline in demand over the next year and many expressed concerns about the potential for a recession. Employment increased moderately; nonbusiness contacts saw little change in activity; consumer spending was flat; business spending and construction and real estate activity declined slightly; and manufacturing decreased modestly. Prices and wages rose moderately, while financial conditions tightened slightly further. Expectations for farm incomes in 2023 decreased some.
Labor Markets
Employment rose moderately in late May and June and contacts expected a similar rate of increase over the next 12 months. Many contacts continued to have difficulty finding workers, particularly higher skilled labor, though many also said that hiring had become easier, and several noted they were fully staffed. One program administrator observed that some manufacturers were managing changing labor needs by briefly laying off workers and then rehiring them, sometimes repeatedly. Wage and benefit costs rose moderately. A few contacts noted wage increases in the 3 to 5 percent range in recent labor union contract agreements. Some indicated healthcare costs had risen significantly.
Prices
Prices rose moderately over the reporting period and contacts expected a similar rate of increase over the next 12 months. Nonlabor costs were up modestly, with rising raw materials and energy costs contributing to the increase. Contacts continued to note that growth in shipping costs had slowed noticeably. One contact in finance reported improved margins for his manufacturing clients, who saw input costs come down but were able to maintain higher selling prices. Consumer prices generally increased moderately due to the continued elevated level of demand and the passthrough of higher costs.
Consumer Spending
Consumer spending was little changed in late May and June. Nonauto retail spending was flat overall, with contacts highlighting increased sales of furniture and lawn and garden products but declining sales at convenience stores and in the electronics and building materials segments. Spending further shifted toward essential items and away from discretionary ones, and for many products, consumers continued to trade down in quality or convenience. Light vehicle sales were unchanged but at a higher level than had been expected earlier in the year. Leisure and hospitality spending was also flat but at a strong level, with contacts reporting a small increase in spending at amusement parks and tourist attractions but less air travel. Contacts indicated that consumers were less likely to trade down in their leisure and hospitality purchases compared with other spending categories.
Business Spending
Business spending declined slightly in late May and June. Capital expenditures were unchanged on balance, with several contacts reporting purchases of new equipment or software. Freight volumes declined further. Demand for industrial, commercial, and residential energy increased slightly. Inventories for most retailers were a little higher than desired, with one contact noting elevated stocks of apparel, beauty items, and sporting and outdoor goods. Auto inventories rose slightly but remained below pre-pandemic levels, with contacts noting that railcar shortages were slowing deliveries of vehicles to dealers. In manufacturing, inventories increased modestly, and contacts said that supply chain issues, while still arising at times, had returned to pre-pandemic norms.
Construction and Real Estate
Construction and real estate activity decreased slightly over the reporting period. Residential construction ticked down, reflecting a slowdown in single-family development. New home sales decreased slightly, while new home prices increased slightly. Residential real estate activity was little changed. An Iowa contact said that cash transactions continued to be a larger proportion of sales than they have been historically as high interest rates were pushing borrowers out of the market. Existing home prices were down some, while rents were flat. Nonresidential construction activity slowed overall as high interest rates, elevated cost pressures, and shortages of key inputs such as electrical components weighed on activity. Nonresidential construction prices remained at elevated levels. Commercial real estate activity decreased modestly. Prices decreased slightly, rents fell modestly, and vacancy rates were up slightly.
Manufacturing
Manufacturing demand decreased modestly in late May and June and backlogs were down moderately. Steel orders were up slightly, supported by solid demand from the auto and construction industries. Fabricated metals orders decreased slightly, in part due to weaker demand in the aerospace sector. Machinery sales also decreased slightly, with contacts highlighting less demand from the auto industry. In contrast, auto industry contacts said production was steady on balance. Heavy truck orders increased slightly amidst very low inventories.
Banking and Finance
Financial conditions tightened slightly further on balance during the reporting period. Bond and equity market values edged up, while volatility edged down. Business loan demand decreased modestly, as borrowing rates rose and standards tightened some. One contact said weak demand was concentrated among clients in the consumer discretionary, durable goods, and retail sectors, which were seeing slowing sales. Business loan quality deteriorated a bit. Consumer loan demand decreased slightly overall, but several contacts noted greater credit card usage. Consumer loan quality decreased slightly, while borrowing rates rose modestly and lending standards were somewhat tighter.
Agriculture
Expectations for Seventh District farm incomes for 2023 deteriorated some as drought expanded throughout the District. One contact said, "It is time to be concerned, but too soon to panic." Crops were behind normal growing progress. Expectations for this year's corn crop worsened more than for soybeans because corn is more sensitive to drought at this growth stage. Crop prices were volatile during the reporting period; while corn prices ended down, soybean prices were up, and wheat prices were about the same. Some input costs were lower. Prices for milk were down once again, extending losses for dairy farms. Although hog prices moved up some, producers continued to struggle to turn a profit. Egg prices edged up. Cattle prices made further gains, as drought limited water and forage availability, forcing farmers to trim their herd sizes.
Community Conditions
Community, nonprofit, and small business support contacts reported little change in activity, which was at a robust level. That said, there were signs the economy was cooling. State government officials saw slowing growth in tax revenues and a small increase in demand for unemployment insurance. High interest rates were challenging Community Development Finance Institutions' efforts to lend at affordable rates to low- and moderate-income borrowers, including small businesses and prospective homeowners. Contacts offering small business services, in particular to small manufacturers, reported that a lack of workers remained an important issue and was holding back production. At the same time, contacts engaged with low wage workers stressed that wages were too low to meet daily needs in the face of rising costs, particularly for housing.
For more information about District economic conditions visit: https://www.chicagofed.org/research/data/cfsec/current-data