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 expanded at a moderate pace in June, and contacts remained cautiously optimistic about growth prospects in the second half of the year. Growth in consumer and business spending picked up. Manufacturing production increased as did construction, led by continued improvement in the residential sector. Credit conditions tightened moderately. Cost pressures were again mild, and wage pressures remained moderate. Crop conditions improved, with the crop ending the period in better shape than a year ago.

Consumer spending

Growth in consumer spending increased in June. Contacts attributed the pick-up in the pace of growth to recent gains in consumer confidence, an increase in auto dealer incentives and other retail promotions, and the rebounding housing market. Auto sales increased at a faster rate than non-auto retail sales. Auto dealers reported strong sales of both pick-up trucks and small passenger cars, as well as an increase in activity in the leasing market. For non-auto retail sales, contacts noted that high-end retailers and discount stores both continued to fare better than middle market retailers.

Business spending

Growth in business spending also picked up in June. Spending on equipment and software increased slightly, as did spending on structures. A few contacts reported an increase in merger and acquisitions activity, but noted that deals were being delayed by uncertainty surrounding the economic outlook. Inventory investment was also impacted by elevated uncertainty. Retail contacts reported that inventories remained tight, as many retailers were planning to wait until after the back-to-school season to re-assess the state of demand and before placing the bulk of their holiday orders. Manufacturers were also limiting inventory investment, with a contact noting that steel service centers were liquidating inventories given weak demand. Labor market conditions continued to improve slowly. Demand for skilled workers remained relatively stronger, particularly for healthcare, information technology, engineering, and other technical occupations. Manufacturing contacts, however, were generally more cautious in their hiring plans, with some layoffs reported in industries where activity has slowed considerably in recent months. In addition, several retailers reported that the Affordable Care Act would lead to more part-time and temporary versus full-time hiring.

Construction/real estate

Construction and real estate activity continued to increase gradually in June. Demand for residential construction grew steadily, as multifamily construction remained strong and single-family construction continued to improve. A homebuilder noted that while new single-family development remained limited, improvement of vacant lots in existing developments was increasing. Activity in the residential real estate market continued to increase as well, with home sales, prices, and rents rising. Nonresidential construction grew at a modest pace, driven in large part by the ongoing expansion of the auto industry. However, a contact noted that planned upgrades to auto supplier facilities were nearly complete; and that with auto production getting back to pre-recession levels, any additional capacity expansion was likely to be incremental. Commercial real estate conditions continued to improve as rents rose slowly and vacancies fell.


Manufacturing production increased in June. The auto industry continued to be a source of strength, with the traditional summer shut-down period scaled back this year to meet the increase in customer demand. Vehicle demand was strong across all sectors, and auto industry contacts reported growing confidence that activity will remain robust in the second half of the year. Steel production again grew at a moderate pace, and specialty metal manufacturers reported a modest improvement in new orders and order backlogs. In contrast, demand for heavy equipment remained soft, although contacts anticipated a slight improvement in the remaining months of the year. Mining activity continued to weaken, and contacts expressed concern over the effect environmental regulations would have on the coal mining industry moving forward. Demand for construction equipment picked up some as the housing market continued to improve.


Credit conditions tightened moderately over the reporting period. Volatility increased across a number of asset classes and corporate borrowing costs rose. Financial market participants noted lower activity in fixed income markets, particularly the high-yield corporate debt market. Banking contacts cited less demand among their larger clients for leveraged financing, and continued uneven growth in the middle market driven mostly by refinancing of existing debt. Credit standards remained roughly unchanged, although contacts reported additional downward pressure on pricing. In contrast, consumer loan demand increased over the reporting period, particularly for auto lending. With the recent increase in mortgage rates, mortgage refinancing slowed, but contacts again noted an increase in new mortgage originations.


Cost pressures remained mild in June. Commodity prices continued to trend lower, although some contacts noted increases in the prices paid for concrete, drywall, metals such as steel and copper, and energy goods and services. Retailers again reported mostly modest increases in wholesale prices; and, overall, pass-through to downstream prices was limited. Wage pressures remained moderate, although many contacts again noted rising healthcare and other benefit costs. Some of these higher costs were being passed on to employees.


Crop conditions improved over the course of the reporting period, with the crop ending the period in better shape than a year ago. District farmers managed to get their crops in the ground despite additional planting delays caused by the unseasonably wet weather. Only a small percentage of acres will not grow a crop, where water pooled in low-lying areas and replanting was not possible. Fruit crops could produce record yields this year, in sharp contrast with the large losses seen a year ago. With stocks of corn and soybeans expected to remain at very low levels until the fall harvest, corn and soybean prices moved higher. The increase in feed costs negatively affected livestock operations, and contacts noted that it would lead to careful management of feed purchases until anticipated declines in crop prices are likely to materialize following a potentially record fall harvest. The first cutting of hay was mostly complete and was much better than last year. Supported by rejuvenated pastures, milk output also increased. Milk prices were roughly unchanged during the reporting period, while hog prices surged, and cattle prices were lower.

SOURCE: Federal Reserve Board

Before it's here, it's on the Bloomberg Terminal.