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 slow pace in October and early November. Contacts noted heightened uncertainty over the near-term economic outlook as the deadline for the fiscal cliff approaches, but remained cautiously optimistic that growth would pick up to a moderate pace in 2013. By sector, gains in consumer spending were up slightly from the previous reporting period, while growth in business spending moderated further. Manufacturing production decelerated, while construction increased at a slow but steady pace. Credit conditions continued to improve gradually. Cost pressures were little changed, although food prices eased. Corn and soybean production in the District did not suffer as much from the drought as previously had been expected.

Consumer spending. The pace of consumer spending, while still moderate, increased slightly from the previous reporting period. Furniture sales improved slightly, while sales of electronics were flat from the previous reporting period. In contrast, retail auto sales fell, in part because incentives have become more directed towards leasing. Overall, retail sales surpassed expectations, which contacts attributed to promotions and generally improving consumer confidence. Nonetheless, some retailers noted a slower sales pace in early November, and many lowered their expectations for the first half of 2013. In particular, contacts expressed concern over the impact of potential changes in federal tax policy on consumers’ willingness to spend.

Business spending. Growth in business spending moderated further in October and early November. Inventory investment continued to slow. Retail contacts reported no transportation delays stemming from Hurricane Sandy; and inventories, although slightly elevated, were indicated to be within typical seasonal ranges. Steel service center inventories were also slightly elevated, and manufacturers reported that material lead times decreased significantly. Capital spending on equipment and structures also slowed. A number of contacts reported that given the heightened uncertainty surrounding the near-term economic outlook, they were reluctant to make capital expenditures beyond productivity enhancements. Labor market conditions improved slightly from the previous reporting period. Job growth in manufacturing slowed, but there was an increase in professional services employment. However, a number of firms noted that they have put hiring plans on hold and have delayed temp-to-perm conversion decisions until next year. Those that did report ongoing plans to hire continued to note difficulty in finding skilled workers, and many have created internal training programs as a result.

Construction/real estate. Construction activity continued to increase at a slow, but steady pace in October and early November. Multi-family construction remained a source of strength with the continued rise in residential rents and declines in apartment vacancies. Single-family construction also increased. For the first time in several years, homebuilders reported new land development projects were underway, although these remained limited to a handful of desirable locations. Demand for nonresidential construction continued to increase at a slow pace, with contacts noting that many of their customers are waiting for the resolution of the fiscal cliff and stabilization in Europe before moving ahead on capital spending projects. Vacancy rates remained elevated for many property types, and contacts indicated that few leasing and acquisition deals are being made in the retail and office spaces. That said, contacts also noted some signs of improvement in commercial real estate conditions, pointing to moderate declines in vacancies and space available for sublease.

Manufacturing. Manufacturing production decelerated in October and early November. Contacts expected activity to remain subdued in the coming year, and voiced concerns about the potential impact of the fiscal cliff and weaker global demand for their products. Exports to Europe and Asia as well as many parts of South America softened, but remained stronger to North America, particularly to Mexico. Capacity utilization in the steel industry decreased, but an industry contact reported that orders were anticipated to pick up some over the next two quarters. Specialty metal manufacturers also reported weaker orders. There was continued strength in demand from the power generation industry, and the heavy equipment and auto industries also remained sources of strength. However, contacts expect demand for heavy machinery to flatten in 2013 as dealer rental fleet growth returns to more a normal pace. In contrast, improving housing demand continued to benefit manufacturers of construction materials.

Banking/finance. Credit conditions continued to gradually ease in October and early November. Credit spreads and financial market volatility remained low, and asset quality steadily improved. Banking contacts reported modest growth in small business loan demand, but also slower growth in debt restructuring and leveraged finance deals as well as lower utilization of credit lines. Contacts attributed the decrease in credit demand from middle market customers to heightened uncertainty about future tax rates on capital spending. Loan pricing and standards remained broadly unchanged, with the exception of commercial and industrial and auto lending, where credit terms and availability continued to ease. Contacts noted that community and regional banks have been particularly aggressive in pricing and covenants to compete with larger banks for a limited supply of new loan opportunities.

Prices/costs. Cost pressures were little changed in October and early November. Several contacts noted that even though steel and scrap prices were lower than they were a few months ago, both had increased in recent weeks. A contact in the steel industry noted that the recent rise in scrap prices may reflect the impact of Hurricane Sandy as well as slightly higher global demand. Construction contacts also reported an increase in prices of raw materials such as lumber. Retail food prices eased, on balance, as higher prices for meat were offset by lower prices for produce, dairy, and some other grocery items. More generally, retailers indicated that discounting and promotions for non-food items also eased some over the reporting period, but were expected to pick up again after Thanksgiving. Wage pressures remained moderate, but nonwage costs increased as many contacts again cited higher healthcare costs.

Agriculture. The corn harvest was completed ahead of last year’s pace, while the soybean harvest was proceeding more quickly than typical. Much of the District reported higher yields than had been expected during the previous reporting period, reflecting in part timely local rains, later planting, and irrigation. Nonetheless, the drought still cut the District’s output of corn and soybeans substantially relative to last year. Concerns about crop quality due to the drought seemed to diminish, although there were some reports of deliveries rejected for crop diseases. Corn and soybean prices--and with them livestock feeding costs--fell further, though they remained elevated from the levels of a year ago. Milk, hog, and cattle prices edged up from the prior reporting period, which also helped the cash flow of livestock operations. Sugar beet output in Michigan was higher than a year ago, and sugar prices were higher as well. Farmland values continued to rise despite the drought. Moreover, there seemed to be more farmland available to buy, partly due to uncertainty about future tax rates.

SOURCE: Federal Reserve Board

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