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 continued to expand at a slow pace in January and February. Many contacts expected that growth would be weak in the first half of 2013, partly because of uncertainty over federal fiscal policy, but that activity would rebound in the second half of the year. Growth in consumer and business spending slowed during the latest reporting period, but the pace of manufacturing production improved. Residential construction rose at a moderate pace while nonresidential construction remained weak. Credit conditions continued to improve gradually. Cost pressures increased some, while wage pressures remained moderate. Prices for corn, wheat, milk, hogs, and cattle moved lower, while soybean prices moved higher.

Consumer spending.

Consumer spending increased at a slower rate in January and February. Retailers pointed to the negative impacts on household budgets from rising gas prices and the end of the payroll tax holiday as explanations for the slower pace of retail sales. Sales of clothing, furniture, and health and personal care items were weaker. However, gift card redemptions boosted sales of electronics, appliances, music, and sporting goods. Grocery stores also reported a slight increase in sales, while restaurant sales were flat. Auto sales were steady for much of the reporting period before increasing slightly over the last few weeks. Car and truck sales both improved, with all-wheel vehicles registering the largest gains. Severe winter weather conditions also led to an increase in service department activity. Looking ahead, retailers expressed concern that potential fiscal policy tightening would continue to have a negative impact on consumer sentiment and retail sales throughout the remainder of the first quarter.

Business spending.

Growth in business spending slowed in January and February. Inventory investment declined, and spending on equipment and structures was again limited. Several manufacturers noted that they plan to make capital expenditures this year only as necessary, delaying investments because of heightened uncertainty surrounding fiscal policy. Those non-manufacturing contacts that reported increased capital expenditures were primarily spending on additional vehicles and information technology. Labor market conditions were little changed. Hiring continued to increase slowly. Contacts indicated that there is still strong demand for talent in skilled professional and manufacturing jobs. However, several manufacturing contacts expressed plans to either invest in more productive capital equipment or adjust the hours of existing employees before hiring new workers this year. In addition, a staffing firm noted that demand for temporary employees had improved --largely based on an increase in demand from the manufacturing sector -- but remained weaker in the District than for the rest of the nation.

Construction/real estate.

Construction and real estate activity was again mixed in January and February. Demand for residential construction continued to increase slowly, buoyed by ongoing strength in multifamily construction. A contact noted that some builders are in the early stages of looking for new land to develop. Even so, many builders and lenders remain very cautious to re-enter the single-family market. Conditions in the residential real estate market improved slightly, with home prices edging higher and the inventory of unsold homes declining. Home sales reportedly picked up in wealthier communities, but sales continued to lag in low and moderate-income communities. Although there was some modest growth in nonresidential construction, the level of activity remains weak. Notably, while some new projects are slated to break ground, growth in commercial and office space is expected to remain below trend for some time. However, contacts did note that construction of private-practice facilities close to affiliated hospitals is an area of strength in this segment. Commercial real estate leasing activity was generally unchanged- -rents held steady, while vacancy rates continued to come down slowly. In contrast, some manufacturers were reportedly leasing temporary space in order to accommodate increased demand.


Growth in manufacturing production picked up in January and February. The auto industry remained a source of strength, with light vehicle sales expected to increase throughout the year. Specialty metal manufacturers reported increases in new orders and order backlogs; but many expressed concern about the increased volatility of their customers’ orders, citing heightened uncertainty over the regulatory and fiscal environment. Inventories at steel service centers were noted to be below desirable levels. A steel producer stated that the steel market is currently moving sideways, but sees signs that activity will pick up later in the year. Manufacturers of household goods also reported a pick-up in demand as the housing market continued to improve. However, a manufacturer of building materials noted that demand had slowed some for their product since the end of last year. Demand for heavy equipment also weakened, with lower coal prices contributing to less mining activity. Furthermore, contacts indicated that heavy equipment dealers were working through an excess inventory of construction equipment. The recent weakness is expected to be temporary, with demand projected to rebound in the second half of the year.


Credit conditions continued to ease over the reporting period. Credit spreads and financial market volatility remained low and asset quality continued to improve. While underlying risk free rates have risen since the last reporting period, competition among lenders and investor willingness to accept more risk prevented an increase in private borrowing rates. Banking contacts reported moderate growth in business and consumer loan demand, with pricing relatively unchanged but some loosening of loan standards. Residential real estate lending, in particular, continued to benefit from historically low interest rates. Contacts noted banks are keeping few very mortgage originations on their balance sheet and relying on interest rate swaps to hedge against a potential rise in interest rates.


Cost pressures were moderately higher in January and February. Contacts noted some upward pressure on raw materials prices, particularly for lumber, drywall, steel, aluminum, and copper. Several also cited rising energy and transportation costs, pointing to higher gasoline and natural gas prices. Retailers reported modest wholesale price increases for a number of products and larger price increases for meat, fresh produce, and leather. Pass-through to downstream prices, however, was limited. Wage pressures remained moderate. Costs for healthcare and other benefits continued to increase; some contacts noted that they were passing along the higher costs to employees. More generally, higher compensation costs were not being passed on to customers.


Snow and rain continued to boost topsoil moisture levels, although depleted subsurface moisture remained a concern for farmers. Between engineering work on the Mississippi River, higher water levels, and low export demand for grain, congestion eased for barge activity. Corn and soybean stocks at grain elevators were even tighter than last year, as many farmers continued to store a share of their crops on hand in anticipation of higher profits closer to harvest this year. Input costs for planting have not changed substantially over the winter. Corn, wheat, milk, hog, and cattle prices dipped during the reporting period, while soybean prices moved a little higher. The prices for corn and soybeans in February become the benchmarks for potential compensation from crop revenue insurance plans; these prices were high enough to guarantee that insured crop operations will cover their production costs this year. Lower feed costs aided the cash flows of livestock operations. Lower corn prices also led to higher ethanol production.

SOURCE: Federal Reserve Board

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