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Chicago: November 2019

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Beige Book Report: Chicago

November 27, 2019

Summary of Economic Activity
Economic activity in the Seventh District increased slightly overall in October and early November, and contacts expected growth to continue at a similar pace over the next 12 months. Employment, consumer spending, and manufacturing all increased slightly. Construction and real estate activity was little changed, while business spending decreased slightly. Wages and prices rose slightly and financial conditions improved modestly. More poor weather added to crop farmers' difficulties.

Employment and Wages
Employment increased slightly over the reporting period, though contacts expected a somewhat faster rate of growth over the next 12 months. Hiring continued to be focused on professional and technical, sales, and production workers. As they have for some time, contacts indicated that the labor market was tight and that it was difficult to fill positions at all skill levels. Multiple contacts reported bringing back retired workers as a way to fill openings. Manufacturers facing slow demand again reported cutting hours rather than laying off workers because they were worried the tight labor market would make it too difficult to hire when demand recovered. A staffing firm reported a slight decrease in billable hours due to lower demand from manufacturers. Wages increased slightly overall; contacts were most likely to report increases for managerial, professional and technical, and administrative workers. Benefits costs increased slightly as well.

Prices moved up slightly in October and early November, though contacts expected prices to rise at a somewhat faster pace over the next 12 months. Retail prices increased modestly. One contact said that food, home goods, and apparel retailers were struggling to pass on higher costs; in contrast, another contact noted that retailers continued to raise prices to reflect higher potential and realized tariffs. Producer prices were flat, with contacts reporting little change in input costs.

Consumer Spending
Consumer spending increased slightly on balance over the reporting period. Nonauto retail sales decreased slightly, as declines in apparel, appliances, and furniture outweighed gains in the grocery, home improvement, hospitality, and lawn and garden sectors. Contacts noted that brick and mortar department stores continued to struggle as e-commerce spending grows. Contacts remained optimistic that holiday spending would be higher than last year. Light vehicle sales increased moderately over the reporting period. The UAW-GM strike had a limited effect on GM vehicle sales on net, with a decline in sales in October offset by a pickup in November. However, dealers reported a noticeable shortage in GM parts, particularly those needed by collision repair shops. Used light vehicle sales also moved up moderately.

Business Spending
Business spending decreased slightly in October and early November. Retail inventories were a little high overall. One contact indicated that retailers were building stocks as a hedge against potential tariff increases. Inventories of GM vehicles were lower than normal due to the UAW strike, but contacts expected them to return to normal by the end of the year. Most manufacturers reported comfortable inventory levels. Capital spending declined some, though contacts expected a modest increase in spending over the next 12 months. Outlays were primarily for IT equipment and intellectual property. A majority of contacts reported that their newly purchased capital had increased capacity. Demand for transportation services declined modestly, most noticeably for long distance trucking. Commercial and industrial energy usage declined modestly due to lower demand from the industrial sector. Contacts attributed at least part of the decline to the GM strike.

Construction and Real Estate
Construction and real estate activity was little changed over the reporting period. Residential construction increased slightly. There were reports that slower growth in demand had led some single-family homebuilders to slow the pace of new development projects. One contact noted an increase in remodeling demand. Home sales declined slightly overall, with larger decreases for homes at higher price points. Overall, home prices were unchanged, while rents increased. Nonresidential construction activity decreased marginally. Commercial real estate activity was little changed at a strong level. Contacts noted that demand for industrial space, particularly for warehousing and logistics, continued to be solid, and activity in the hospitality sector was also strong. Contacts reported that demand for commercial real estate as an investment vehicle was robust because of relatively high capitalization rates in the District compared to other regions. Vacancy rates edged lower and the availability of sublease space increased slightly. Rents were unchanged.

Manufacturing production increased slightly overall in October and early November in spite of the strike at GM. Steel demand increased slightly, with one contact reporting strong demand from energy transmission firms but slightly weaker demand from the auto sector. Heavy machinery demand increased slightly, spurred by growth in the construction and mining industries. Auto production declined due to the GM strike, but contacts reported that overall auto industry demand was flat and at a solid level. Contacts supplying GM reported lower shipments due to the strike and expected the recovery in activity to take until the end of the year. Specialty metals manufacturers reported little change in order books, with flat activity across most major sectors. Contacts reported increased shipments of heavy trucks, but a decline in new orders. Manufacturers of building materials reported a slight increase in sales.

Banking and Finance
Financial conditions improved modestly on balance over the reporting period. Business loan demand increased slightly, with reports of strength in the commercial construction sector, but weakness in the agricultural sector. Loan quality edged down and standards were little changed. Consumer loan volumes increased modestly as lower rates continued to spur mortgage refinancing. Quality and standards were little changed.

Early frost and snow further delayed this year's harvest and diminished yields. Overall, contacts expected the District's corn and soybean harvests would be much smaller than a year ago. In addition, contacts expressed concern about crop quality, especially with short propane supplies in some places, which limited the amount of crop drying farmers could do. Corn and soybean prices were down from the previous reporting period, but up from a year earlier. Nevertheless, lower expected yields meant crop revenues would be down from a year ago. Milk, egg, hog, and cattle prices moved up during the reporting period. Contacts noted that demand for pork from China had grown despite U.S. tariffs because African swine fever had decimated China's hog herd. More generally, contacts reported a pickup in overall agricultural exports, with some noting that news on trade negotiations sounded promising for future exports. Farm incomes generally are expected to be down from last year, although government payments from the Market Facilitation Program will provide some support.

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