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 in late August and early September, but again at a slow pace. However, contacts remained guardedly optimistic that conditions would improve; noting that at least some of the uncertainty surrounding the outlook was likely to be resolved following the November election. Growth in consumer spending was little changed, while business spending increased at a slower rate. Manufacturing activity edged lower, and growth in construction moderated. Credit conditions continued to improve gradually. Cost pressures increased some, due in large part to higher food and energy prices. The drought led to an earlier start than normal for the harvest, and corn and soybean prices moved down a bit.
Consumer spending. Growth in consumer spending was little changed in late August and September following a slight pick-up in the previous reporting period. Sales of back-to-school items were somewhat below retailers’ expectations despite higher store traffic volumes. Contacts noted that the rise in gasoline prices had further deterred consumers from increasing discretionary spending. Retailers lowered their expectations for the holiday shopping season, although they still expect holiday sales to match last year’s pace. Auto sales increased in August before moderating some in September. Consumers responded strongly to model year-end incentives, depleting inventories of 2012 models, and also benefitted from easing auto credit conditions.
Business spending. Business spending continued to increase slowly in late August and September. A number of contacts reported that firms were delaying hiring and capital expenditure decisions until they were more certain about the outlook for federal tax and spending policies. That said, some capital expenditures were proceeding as planned, particularly on software and equipment. Inventories were generally indicated to be at comfortable levels. Labor market conditions were weaker on balance. The District unemployment rate edged up and hiring remained selective. A recruiting firm indicated that overall demand for their services was effectively flat at last year’s levels. Demand was greater in areas such as health care, engineering, accounting, information technology, and skilled manufacturing trades where firms are having difficulty finding qualified candidates. Several manufacturers reported stepping up training programs and increasing pay to meet staffing needs in a number of skilled trades.
Construction/real estate. Growth in construction moderated some from the previous reporting period. Homebuilders indicated that new single-family construction continued to rise at a slow but steady pace, while multi-family construction was stronger by comparison. Loan standards for residential development remained tight, and many homebuyers also continued to face tight lending standards. Home prices edged higher, despite a rise in short sales. Nonresidential construction increased at a slower rate. Contacts indicated that new projects were progressing at a reduced pace; some also suggested that many firms were putting off investment decisions until after the November election. Elevated vacancy rates remained a drag on new commercial construction, and contacts noted that bank lending for investment properties continued to be limited.
Manufacturing. Manufacturing production edged lower in late August and September. Contacts reported that new orders had slowed considerably from earlier in the year and that order backlogs were coming down. Nonetheless, a number of contacts also indicated that quoting activity for next year had picked up, suggesting to them that the recent slowdown may be a pause due to the upcoming election and uncertain fiscal situation. Although the level of activity remained strong, demand for heavy equipment softened over the reporting period, largely reflecting further declines in the mining sector and a slower expansion of rental fleets. Exporters generally noted weaker demand outside of North America, particularly from Europe and Asia. Capacity utilization in the steel industry was steady, while steel service center inventories increased slightly. In contrast, the auto industry continued to be a source of strength, and manufacturers of building materials reported that activity had picked up with the recent improvement in the housing sector.
Banking/finance. Credit conditions continued to improve over the reporting period, with both credit spreads and market volatility decreasing. Banking contacts reported continued weak demand for business loans. While loan pricing was roughly unchanged, contacts cited greater demand for more flexible structures and longer financing terms. Standards continued to ease on C&I loans, although conventional financing remained difficult to obtain for many small businesses. Asset quality improved further, surpassing the expectations of some contacts. An exception was agricultural lending, particularly the livestock sector, where the impact of the drought on feed costs is putting stress on operators’ balance sheets. Consumer loan demand was again limited with moderate increases in auto lending and mortgage refinancing, as auto loan standards continued to ease and mortgage rates moved lower.
Prices/costs. Cost pressures increased some in late August and September, primarily due to a rise in food and energy prices. Contacts also reported increases in the prices for construction materials like lumber and drywall, while most metals prices were steady. Wholesale food and energy price pressures rose, and retail contacts noted an increase in pass-through to consumers. Wage pressures remained moderate, although some upward pressure on wages for high skilled positions was cited. A few contacts also reported upward pressure on healthcare costs.
Agriculture. The corn and soybean harvest began a few weeks earlier than normal across the District, as plants were dry due to the drought. In some areas, late rains helped produce higher- than-anticipated yields, but these made only a small dent in the large drought-related losses. Crop quality also was an issue in parts of the District. The drop in crop volume hurt grain elevators relatively more than crop farmers, as payments from crop insurance and sales at high prices offset much of the loss in farm income from the drought. However, given insurers’ limited processing capacity and the large number of claims, already existing delays in crop insurance payments are likely to get worse. Corn and soybean prices eased down from their peaks, providing a bit of relief for livestock producers, though most operations remained unprofitable. Milk and cattle prices moved higher, while hog prices fell. Many hog facilities are operating below capacity, pointing to future reductions in supplies of pork.
SOURCE: Federal Reserve Board