Beige Book Report: Chicago
October 18, 2023
Summary of Economic Activity
Economic activity in the Seventh District was up modestly overall in late August and September. 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; consumer and business spending were up slightly; nonbusiness contacts saw little change in activity; and manufacturing, construction, and real estate activity decreased modestly. Prices and wages rose moderately, while financial conditions tightened slightly. Expectations for farm incomes in 2023 were little changed.
Labor Markets
Employment rose moderately over the reporting period and contacts expected a similar rate of increase over the next 12 months. Many contacts continued to have difficulty finding workers, particularly those with higher skills. Several noted strong, steady demand for workers in the skilled trades. However, there were also signs that the labor market was cooling. Some contacts said workers were job-hopping less and pushing back less on wage offers. In retail, holiday hiring was down modestly compared with the same time last year. Wage and benefit costs rose moderately, but there were indications growth was slowing.
Prices
Prices rose moderately in late August and September, and contacts expected a similar rate of increase over the next 12 months. Nonlabor costs were up modestly, with several contacts highlighting rising energy costs. Some contacts noted that while they had fewer supply chain issues, costs of raw materials remained high. Shipping prices increased slightly, largely because of higher gasoline prices. Consumer prices moved up moderately due to solid demand and the passthrough of higher costs.
Consumer Spending
Consumer spending increased slightly over the reporting period. Nonauto retail sales were up a bit. Contacts highlighted higher overall grocery sales, though one noted that lower income shoppers had reduced their basket size and were trading down in quality. Back-to-school and early holiday volumes met expectations. Led by declines at hotels and restaurants, leisure and hospitality spending softened slightly. Light vehicle sales edged up. Multiple contacts said that so far, the UAW strike was having a negligible effect on sales and inventories but was influencing parts availability.
Business Spending
Business spending increased slightly in late August and September. Capital expenditures moved up a bit, with several contacts reporting purchases of new equipment, software, or expansions of existing facilities. That said, several contacts noted that high interest rates were leading them to delay some acquisitions. In addition, one manufacturing contact said that increases in operating, labor, and materials costs were holding back equipment investment. Demand for industrial and commercial energy increased slightly, while demand for residential energy decreased modestly. Inventories for most retailers were a little higher than desired. Looking ahead, one contact reported retailers had ordered less merchandise for the holidays than in previous years, with some foregoing the usual seasonal inventory build. In manufacturing, inventories were generally at comfortable levels, and several contacts noted improved supply chain conditions.
Construction and Real Estate
Construction and real estate activity decreased modestly on balance over the reporting period. Residential construction was down modestly and contacts expected the slower pace of activity to continue for the rest of the year. There were reports of fewer home remodeling projects in higher end homes. Residential real estate activity also decreased modestly. Home prices were up slightly but rents were unchanged. Nonresidential construction fell slightly. Contacts noted that the building currently taking place had entered the pipeline 12 to 24 months ago and that permit issuances for future projects were down noticeably. Land development also declined. Supply chain issues lingered, with contacts reporting difficulty finding electrical switch boxes, circuit boards, transformers, fuses, and HVAC equipment. Commercial real estate activity decreased modestly, most notably in office and retail. Prices decreased modestly, and contacts anticipated further declines. Vacancy rates and the availability of sublease space were up. Rents were down slightly.
Manufacturing
Manufacturing demand decreased modestly in late August and September. Steel orders were down modestly, helping push up service center inventories. Fabricated metals orders decreased slightly, with contacts highlighting lower demand from homebuilding and aerospace. Machinery sales were steady on balance: while there was a decline in demand from the auto sector, demand for machinery used in infrastructure construction was still strong and plenty of projects are in the pipeline. Motor vehicle production fell with the UAW strike; at the end of the reporting period, a little over 10 percent of U.S. production was offline. According to one auto supplier, automakers were willing to pay high prices to get necessary parts before a work stoppage. This supplier received a large order soon before workers at a plant they supply went on strike, and then worked through the weekend and delivered the order via helicopter to meet the automaker's deadline. Heavy truck demand remained flat amidst moderately low inventories.
Banking and Finance
Financial conditions tightened slightly over the reporting period. Bond and equity market asset values decreased slightly while volatility ticked up. Business loan demand fell slightly. Contacts noted a further decrease in commercial loan demand, particularly for real estate. Asset quality was down a bit. Business loan rates increased modestly and standards tightened slightly. Consumer loan demand also fell slightly overall, with auto and home equity loan volumes dropping but credit card debt increasing. Consumer loan quality declined slightly. Consumer loan rates increased modestly, and lending standards tightened some.
Agriculture
Projected farm income in the District for 2023 remained well below 2022 levels, as lower crop prices offset positive news from early harvested acres. Notably, corn and soybean prices continued to fall, while yields were coming in above earlier expectations, which had been pessimistic due to the ongoing drought. Cattle prices moved higher, but growth slowed some. That said, one contact reported that with the exception of beef, many animal operations were experiencing below breakeven prices. Egg prices were flat, while dairy prices were mostly higher. Prices for agricultural land showed signs of softening, especially for ground of lesser quality. Rising interest rates stretched farm finances given high debt levels of many operators.
Community Conditions
Community, nonprofit, and small business contacts reported little change in economic activity from a robust level. State government officials saw some decline in tax revenues but low demand for unemployment insurance continued. Small business owners said tight labor markets were hampering growth and that they were reluctant to pursue expansions, in part because of tighter credit conditions. Nonprofit contacts reported that a limited supply of lower end housing was contributing to rising rents and straining household budgets. In addition, there were long waiting lists for prospective tenants at some places. Contacts noted that in some smaller municipalities limited options for housing and childcare were undermining efforts to attract and retain workers.
For more information about District economic conditions visit: https://www.chicagofed.org/research/data/cfsec/current-data