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Beige Book Report: Chicago

October 18, 2017

Summary of Economic Activity
Growth in economic activity in the Seventh District continued at a modest rate in late August and September, and contacts expected growth to continue at that pace over the next 6 to 12 months. Employment, business spending, and manufacturing increased modestly, while consumer spending increased slightly. Construction and real estate activity was little changed, as were financial sector conditions. Wages and prices rose modestly. Contacts expected the District's corn and soybean harvests to be close to trend, but smaller than last year's record.

Employment and Wages
Employment growth continued at a modest rate over the reporting period, and contacts expected it to continue at that pace over the next 6 to 12 months. Contacts continued to indicate that the labor market was tight and reported difficulty filling positions at all skill levels. A contact in the construction industry indicated that increased demand in the southern US related to hurricanes Harvey and Irma had forced them to rework their production schedule due to a lack of workers. Across all industries, hiring was primarily focused on professional and technical, sales, and production workers, with a notable increase in the number of contacts looking to hire production workers. That said, a staffing firm that primarily supplies manufacturers with production workers reported little change in billable hours. Wage growth remained modest overall. Contacts most often cited wage increases for professional and technical, sales, and production workers, but there were also reports that growing demand for transportation services was pushing up wages for truckers.

Prices
Prices again rose modestly overall in late August and September. Retail prices were little changed for most categories, though there continued to be reports of rising prices for older used cars. A number of contacts again reported increases in costs for raw materials and employee benefits. Transportation costs were also higher, and one contact attributed some of the increase to elevated demand related to hurricanes Harvey and Irma.

Consumer Spending
Consumer spending increased slightly over the reporting period. Non-auto retail sales were mixed, with growth in the personal services, food and beverage, and discount segments balanced by declines at mainstream brick and mortar stores. Retailers indicated that they expected sales during the upcoming holiday season to be slightly higher than last year. Light vehicle sales strengthened somewhat, and the vehicle mix continued to shift from cars to light trucks. The pace of used vehicle sales slowed a bit.

Business Spending
Growth in business spending remained at modest pace in late August and September. In general, retail inventories were at desired levels, though stocks remained high for cars and low for light trucks, particularly crossovers. Manufacturing inventories were at comfortable levels overall, though steel service center inventories were lower than historical norms. Growth in capital spending remained at a modest rate, and contacts expected growth to continue at that pace for the next 6 to 12 months. Outlays were primarily for replacing industrial and IT equipment and for renovating structures, though there was an increase in the number of contacts reporting spending for expansion. Demand for residential, commercial, and industrial electricity was flat.

Construction and Real Estate
Construction and real estate activity was little changed over the reporting period. Residential construction increased slightly, as greater demand for starter homes led more builders to enter the market. There were reports that in some areas newly built starter homes were receiving multiple offers and closing well above the original asking price because of limited availability. Overall, home sales edged lower as tight inventories constrained sales in the low-end segment and weak demand hurt sales in the high-end segment. Home prices were up slightly overall, but growth varied by price level: prices increased noticeably for homes under $250,000, modestly for homes between $250,000 and $500,000, and were down slightly for homes over $500,000. Nonresidential construction edged lower across most market segments. Commercial real estate activity remained strong, and edged up further. Commercial rents increased slightly, vacancy rates moved lower, and the availability of sublease space changed little.

Manufacturing
Growth in manufacturing production generally continued at a modest pace in late August and September. Growth did pick up for some industries: Improved international conditions led to solid gains for heavy machinery producers; hurricanes Harvey and Irma boosted sales of construction materials and RVs (FEMA trailers are modified RVs); and heavy truck manufacturers and producers of packing materials reported strong increases in demand. Contacts in most other industries reported little change in conditions. Activity in the auto sector was flat. Demand for steel continued to grow slowly, though producers expected that improved international demand and tight inventories at service centers would soon lead to more orders. Specialty metals manufacturers reported modest increases overall, and highlighted improved demand from the aerospace and defense sectors.

Banking and Finance
Financial conditions were little changed on balance over the reporting period. Market participants noted that equity prices remained high and volatility remained low. Business loan demand increased slightly, with growth coming primarily from higher capital equipment and real estate spending by the manufacturing and construction sectors. Contacts again indicated that robust competition was creating pressure to lower rates and loosen terms. Consumer loan demand increased slightly. Demand for both home and auto loans picked up and quality remained good. That said, an auto dealer indicated that credit continued to tighten for buyers of new cars with low credit scores.

Agriculture
Contacts expected both the corn and soybean harvests to be close to trend but smaller than last year's record. On balance, crop conditions worsened in late August and September as drought conditions spread in the District. In addition, suboptimal weather conditions earlier in the year meant crops were less mature than normal and that the harvest started later than usual. Corn prices moved down (but were still higher than a year ago), while soybean prices were little changed (and slightly lower than a year ago). With the exception of eggs, livestock and dairy prices were down as supplies stayed plentiful. New hog processing plants in Iowa and Michigan were ramping up more slowly than planned because labor was in short supply. Prospects for agriculture incomes declined overall during the reporting period.

For more information about District economic conditions visit: www.chicagofed.org/cfsbc