U.S. Federal Reserve Beige Book: Chicago District (Text)

The following is the text of the Federal Reserve Board’s Seventh District-- Chicago.


Summary. Economic activity in the Seventh District continued to expand at a moderate pace in January and early February. Growth in consumer spending slowed, but business spending increased. Manufacturing production increased, and construction, while still subdued, was also up. Credit conditions improved. Price increases slowed, while wage increases remained moderate. Prices for corn, soybeans, wheat, hogs, and cattle moved higher, while milk prices drifted lower.

Consumer spending. Growth in consumer spending slowed in January and early February. Contacts indicated that activity was boosted by clearance sales and noted an increase in consumers turning to discount retailers. There was also some isolated improvement in the luxury segment, with jewelers and high-end boutiques reporting higher sales. However, the mild winter depressed sales of apparel and other weather-related items, and contacts noted that many retailers were running heavy promotions on unsold winter merchandise to make room for spring inventory. Auto sales were up in January, but down slightly in early February reflecting in part a decline in incentives.

Business spending. Business spending increased in January and early February. Most retailers indicated their inventories were at comfortable levels. However, a number of auto dealers continued to report lower than desired levels for some models. Several manufacturers also noted that they were tightly managing their input inventory levels to avoid being caught off-guard were commodity prices to decline further or activity slow substantially from the pace of the fourth quarter. Capital spending increased, with reports of capacity expansions in manufacturing and renovations of existing facilities in the retail sector. Labor market conditions improved, although hiring remained selective. A staffing firm reported an increase in growth in billable hours that was largely driven by gains in industrial and office positions. Contacts indicated that many manufacturers were increasingly moving away from contracting with temporary agencies to direct hiring, focusing on higher skilled positions where attracting job candidates has remained difficult. Long-term unemployment remained elevated. Labor market analysts reported that it was becoming increasingly difficult for these workers to find a job, and several contacts indicated that they were hesitant to hire individuals who had been out of work for an extended period of time.

Construction/real estate. Construction activity was up slightly in January and early February. Multi-family construction continued to be an area of strength. In contrast, single-family construction remained weak, and homebuilders indicated that it will likely continue to be until home prices stabilize from their recent declines. Nonresidential construction continued to trend up moderately, although a contact noted a decline in funding for new public infrastructure. Demand for industrial facilities increased, especially in the automotive sector as suppliers are expanding to meet the higher pace of vehicle production. Commercial real estate conditions continued to improve with vacancy rates edging lower from their elevated levels. The demand for office space picked up and rents increased. In contrast, contacts continued to report excess availability of retail space.

Manufacturing. After a strong close to 2011, manufacturing production increased further in January and early February. Contacts in the sector remained cautiously optimistic about 2012. Exporters continued to benefit from advantageous terms of trade, and contacts noted an increase in interest by foreign manufacturers in moving production to the U.S. as well as increasing utilization of domestic suppliers. The auto industry continued to be a source of strength. Contacts expected that auto sales in 2012 would hold near the pace seen in January, which, while still below pre-recession levels, would mark another year of recovery for the industry. Demand for heavy equipment also remained strong, led by robust activity in the energy and mining sector. An aging fleet of heavy trucks and machinery and tightening emission standards for such equipment were noted as reasons for the likely continued strength in demand in 2012. Manufacturers of specialty metals also reported solid order books and robust quoting activity. Outside of these industries, however, activity was again weaker. Manufacturers of household goods and building materials continued to experience soft demand, although a few noted a small improvement since the beginning of the year.

Banking/finance. Credit conditions were slightly improved from the previous reporting period. Financial market volatility declined and risk premia moved lower across a number of asset classes. Improvements in the availability of credit were noted for both subprime auto lending and commercial real estate, particularly for large apartment buildings. Banking contacts indicated that loan growth continued at a moderate pace with demand from larger businesses being stronger than that from small to mid-sized companies. Even though contacts thought the economic outlook was more positive, they indicated that borrowers and investors remain cautious, citing uncertainty about future tax code changes and risks abroad, in particular those emanating from Europe. That said, concerns about Europe were reported to have become milder in recent weeks.

Prices/costs. Cost pressures were largely unchanged in January and early February, but the volatility of commodity prices remained a concern for many contacts. Natural gas prices remained at historic lows, while prices increased for fuel and metals such as copper and brass. Raw materials surcharges declined and lead times shortened with a few exceptions such as carbide and some hydraulic products. Wholesale price changes were mixed by category, but little changed on balance.

Most of the cost increases were being passed on to consumers, but retailers reported that, overall, pricing power remained limited. Wage pressures continued to be moderate, with most contacts indicating that wage increases were expected to keep pace with inflation. Contacts continued to report a shortage of skilled manufacturing workers, and noted that increased competition among firms had led to some upward pressure on their wages. Agriculture. Corn, soybean, wheat, hog, and cattle prices rose during January and early

February. Input costs for agriculture continued to increase, led by sharply higher rental rates for cropland. The increases in these costs have pressured farmers’ margins. In order to offset the risks of price declines or poor harvests, farmers have been willing to spend more on revenue insurance policies. Estimates of corn stocks have come down and are below where they were a year ago. Given current rates of use, the expected supply of corn in stock just before the next harvest is around three weeks, about as tight as last year. Cattle operations are working to build herd sizes, even though bid prices for cattle are very high. Contacts expected farmers to boost their capital expenditures in 2012 compared with 2011.

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