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 again expanded at a modest pace in April and May. While most contacts remained optimistic about growth prospects in the second half of the year, many also expressed a greater sense of caution due to elevated uncertainty over the economic outlook. Growth in consumer spending increased slightly, while growth in business spending slowed. The decline in manufacturing production growth flattened out. In contrast, construction picked up, led by continued improvement in the residential sector. Credit conditions eased somewhat. Cost pressures were steady, and wage pressures remained moderate. Corn, soybean, milk, and hog prices increased, while cattle prices were stable.

Consumer spending. Growth in consumer spending increased slightly in April and May. The delayed arrival of warmer weather spurred sales of spring and summer items such as clothing, building materials, and lawn and garden items. In contrast, furniture and restaurant sales slowed. Promotional activity was heavy during the reporting period. Even absent from sales, contacts noted a more general tendency for customers to move to lower-priced items within shopping categories, especially in food and clothing. Several retail contacts also pointed to the expiration of the payroll tax credit and less spending out of tax refund checks as having a negative effect on their sales. Auto sales were moderately higher. New vehicle sales fell short relative to expectations, but used vehicle sales increased at a faster pace. Small, fuel efficient, crossover vehicles were the strongest sellers, while pick-up truck sales were a little soft.

Business spending. Growth in business spending slowed in April and May. Inventory investment decreased. Retail contacts reported that inventories were at comfortable levels, and, because of low sales expectations, they did not anticipate any substantial stockbuilding over the remainder of the year. Manufacturers also noted closely monitoring inventories given recently weaker demand. Capital expenditures were limited. A number of contacts reported that elevated uncertainty was curtailing their capital spending, pointing to doubts about the durability of the recovery as well as concerns over national fiscal policy. Labor market conditions continued to improve slowly. Uncertainty over health care costs and the pending implementation of the Affordable Care Act caused some firms to delay hiring plans or increase usage of temporary workers. Demand for skilled workers, however, remained strong, with a recruiting firm noting an increase in client orders for healthcare, information technology, and engineering occupations. Contacts indicated that even in the mining industry, where activity has weakened substantially, firms continue to hire engineers at a rapid pace.

Construction/real estate. Growth in construction and real estate activity picked up in April and May. Demand for residential construction grew steadily, as multifamily construction remained strong and conditions for single-family construction continued to improve. Activity in the residential real estate market increased, with home sales, prices, and residential rents rising. Contacts noted that the still large number of underwater mortgages, extended foreclosure processes, and low level of new construction meant that the inventory of existing homes on the market was tight and that this was restraining sales. Nonresidential construction increased at a modest pace. Contacts noted, however, increased activity in the manufacturing sector, particularly from the auto industry. Commercial real estate conditions continued to improve, although vacancy rates remained elevated. Contacts also reported an increase in demand for leasing was pushing up commercial rents, with demand from the healthcare sector noted as being particularly strong.

Manufacturing. The decline in manufacturing production growth flattened out in April and May. Although the auto industry remained a source of strength, it too grew at a more moderate pace. An increase in imports of steel displaced domestic production; nonetheless, a steel industry contact reported that capacity utilization gradually increased over the reporting period. Specialty metal manufacturers reported small increases in new orders, noting that their customers had become more cautious, ordering only as necessary with very short lead times and reassessing supply chains in an effort to cut costs. Exports of heavy machinery were lower, due to weaker demand in Europe and Asia. Contacts in the heavy equipment industry reported that equipment dealers continue to reduce their inventories and that most mining companies have trimmed their orders due to cutbacks in mining investment. In contrast, demand for heavy trucks increased. Suppliers to the aerospace industry noted a pick-up in orders following resolution of the issues affecting the Boeing 787. Improvement in the housing sector also continued to benefit manufacturers of household products such as appliances and fixtures.

Banking/finance. Credit conditions eased some over the reporting period. Corporate borrowing costs declined and demand increased in corporate debt markets as investors continue to reach for higher yields. Banking contacts reported modest growth in business loan demand, with greater competition for high quality assets among larger banks leading to some downward pressure on pricing. Mortgage refinance activity, while still strong, began to slow, but contacts noted a slight increase in purchase applications. Several contacts also reported that the new rules regarding eligibility for GSE backed mortgages are likely to limit the number of people who qualify. With demand deposits growing and comfortable liquidity levels, banks are increasing their willingness to lend. Smaller banks, however, continue to lag behind larger ones, with many noting greater regulatory uncertainty in their traditional areas of lending as a key reason why. Contacts also noted that risk profiles remain slow to change, indicating that a lack of secondary loan market demand and low appraisals of commercial real estate values continue to constrain lending.

Prices/costs. Cost pressures were steady in April and May. Commodity prices were generally somewhat lower, although some contacts noted increases in the prices paid for natural gas, lumber, drywall, copper, steel, and aluminum. Retailers again reported mostly modest increases in wholesale prices, with the exception of continued cost pressures for some food items originating from last year’s drought. Overall, pass-through to downstream prices remained limited. Wage pressures were again moderate, although many contacts noted rising healthcare costs and uncertainty about future employee healthcare obligations associated with the Affordable Care Act.

Agriculture. Heavy precipitation in the District aided the recovery from last year’s drought by replenishing subsoil moisture. The rain also dramatically slowed planting of corn; farmers almost caught up, often by working around the clock once fields had dried sufficiently. However, the emergence of corn plants significantly lagged that of a typical year. Soybean planting progressed at about its normal pace once the corn crop was in the ground. Flooding from the heavy rains also resulted in river closures, delaying deliveries of agricultural products and farm inputs, particularly fertilizer. Current corn and soybean prices rose, as stocks remained low. Late planting pushed back the availability of new supplies into September. However, price declines were anticipated for the new crop in the fall, as concerns over major yield losses abated. Milk and hog prices moved higher; cattle prices were flat.

SOURCE: Federal Reserve Board

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