U.S. Federal Reserve Beige Book: Chicago District (Text)
The following is the text of the Federal Reserve Board’s Seventh District -- Chicago.
Economic activity in the Seventh District increased at a slightly faster pace this reporting period. Retail and manufacturing contacts were more optimistic about the outlook for the rest of the year and early 2011, while construction and financial contacts remained cautious in their assessment. Consumer spending rose moderately, and business spending continued to increase at a steady pace. Manufacturing production also increased, while construction was limited outside of highway and bridge work. Credit conditions were slightly improved. Cost pressures rose, but there was limited pass-through to downstream prices. Wage pressures remained moderate.
Consumer spending was up moderately from the previous reporting period. Retail sales excluding autos increased in October and early November. Consumers continued to spend mostly on essentials, but contacts noted that discretionary and impulse spending were returning slowly. The best selling items again were those most heavily promoted and discounted like apparel, electronics, appliances, and home improvement goods. Retailers also noted greater optimism for the holiday shopping season, with several reporting that they recently had made later-than-usual orders of big-ticket items in anticipation of Black Friday. Auto sales also rose, aided by increased incentives. Auto dealers indicated that inventory had returned to more comfortable levels, although a few again cited a limited supply of stronger selling models.
Business spending continued to increase at a steady pace from the previous reporting period. Capital spending on equipment and structures was little changed. Inventory rebuilding in manufacturing leveled off. However, heavy machinery rental fleets continued to expand, and higher-than-expected fall sales prompted retailers to expand inventories in advance of the holiday shopping season. Hiring was again mostly limited to manufacturers bringing on temporary workers. In contrast, a few manufacturing contacts also reported contemplating increasing the number of work shifts, a decision which would require hiring additional permanent employees. In addition, a staffing firm reported a modest increase in industrial temporary-to- permanent transitions. Outside of manufacturing, hiring in information technology, engineering, and healthcare remained strong; seasonal hiring in retail trade was greater than the prior year; and there was a small increase in demand for temporary office and clerical workers.
Construction activity was limited in October and early November. Elevated levels of unsold homes continued to be a drag on new residential construction and home prices. Home builders reported only a modest improvement in sales, with showroom traffic weak but conversion rates increasing. The availability of mortgage financing, particularly for condominiums, remained a constraint for homebuyers, although lower mortgage rates led to an increase in refinancing. Residential development of new properties was minimal, as builders were instead concentrating their work on existing distressed properties. Private nonresidential construction was again subdued, although contacts reported a small increase in industrial projects. Public construction, driven by highway and bridge work, remained strong.
Manufacturing production continued to improve through October and early November. Contacts generally expressed a very positive outlook for manufacturing, pointing to recent indications of demand firming into early 2011. The fabricated metals, automotive, and heavy equipment sectors were again strong sources of growth in manufacturing. Steel production softened recently, but contacts noted that service center inventories remain lean and that order inquiries for January delivery had accelerated in recent weeks. Orders were also reported to be on the rise for metal fabricators in the automotive, oil and gas, and aerospace industries. Contacts in the automotive industry were relatively upbeat, expecting auto sales to continue to strengthen into 2011 with the retail segment gaining momentum. Freight tonnage and new orders for heavy trucks increased, with strong demand expected next year to replace an aging fleet. Heavy equipment manufacturers reported continued strength in the demand for earth-moving equipment abroad and a recent increase in domestic activity. In contrast, activity was mixed for manufacturers with ties to residential housing. Shipments of construction materials decreased, while shipments of appliances increased in advance of Black Friday promotions.
Credit conditions improved from the previous reporting period. Fierce competition for high-quality borrowers was indicated to be leading to aggressive terms and structures for business credit, although core business loan demand remained weak. In contrast, banking contacts reported an increase in demand for refinancing, merger and acquisition lending, and in agribusiness for working capital. Commercial real estate credit conditions were slightly improved, with CMBS issuance increasing and bank lending for distressed property investment edging up. Consumer lending also picked up a little in October and early November, although contacts worried that the weak labor market and potential end of extended unemployment insurance benefits would limit consumer spending in the coming months. Loan quality improved, increasing bank earnings, but contacts anticipated only modest asset growth in 2011 as business and household deleveraging was expected to continue.
Cost pressures increased from the previous reporting period, but limited pricing power continued to constrain pass-through to downstream prices. Manufacturing contacts cited increases in industrial metals prices like copper, iron ore, and scrap steel; and mill lead times were also said to be rising. Energy prices were mixed. Oil prices moved up, but natural gas prices held at low levels with record storage and a forecast for a warmer-than-normal winter. Retailers also reported wholesale price increases, but most were accepting lower profit margins rather than attempting to pass them along to consumers. Wage pressures again increased only modestly.
Farm earnings were boosted by an early and large harvest. The District harvest should be the third largest ever for corn and the second largest for soybeans. Soybean yields set a record for the District. Corn yields were less than expected in Indiana, Illinois, and Iowa, but above average in Michigan and Wisconsin. This year’s corn crop was of a higher quality. The new corn has been blended with last year’s poor quality crop; grain elevators have been able to sell the blended crop, clearing out storage space. In addition, the low moisture content of harvested corn plus low natural gas prices have kept drying costs to a minimum. Dry weather allowed more time for field work compared with a year ago, and there were reports of shortages of fertilizer and equipment parts due to earlier-than-usual preparations for next year’s crop. Prices for corn, soybeans, milk, hogs, and cattle were all above the levels of a year ago, particularly so for corn. Even with higher feed costs, margins for livestock producers remained positive.
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