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Beige Book Report: Chicago

September 12, 2018

Summary of Economic Activity
Growth in economic activity in the Seventh District picked up to a moderate pace in July and early August, and contacts expected it to continue at that pace over the next 6 to 12 months. Manufacturing production and employment grew moderately, consumer and business spending increased modestly, and construction and real estate activity was up slightly. Wages and prices rose modestly, and financial conditions improved slightly. Overall crop yields in the District appeared set to forge a new record.

Employment and Wages 
Employment growth picked up to a moderate pace over the reporting period, though contacts expected gains to slow to a modest rate over the next 6 to 12 months. Hiring was focused on production, sales, and professional and technical workers. As they have for some time, contacts indicated that the labor market was tight and that they had difficulty filling positions at all skill levels. Manufacturers continued to report that they had delayed or turned down projects because of difficulties in finding workers. There were also reports of firms forgoing layoffs to avoid the challenge of finding workers when demand picked up. A staffing firm that primarily supplies manufacturers with production workers reported no change in billable hours. Wage growth remained modest overall, with wage increases most likely to be reported for managerial, professional and technical, and production workers. Most firms reported rising benefits costs.

Prices rose modestly in July and early August, and contacts expected prices to continue to increase at that rate over the next 6 to 12 months. Retail prices increased slightly overall. Auto dealers noted that the steel and aluminum tariffs had not yet boosted retail prices for light vehicles, but expected them to do so eventually. Producer prices rose moderately, reflecting in part the pass-through of higher labor, materials, energy, and freight costs.

Consumer Spending
Consumer spending increased modestly over the reporting period. Nonauto retail sales rose modestly, with gains in the furniture, appliances, hardware, apparel, and grocery sectors. Contacts in tourism also reported increased activity. New light vehicle sales, however, decreased slightly, while used light vehicle sales increased moderately.

Business Spending
Business spending increased modestly in July and early August. Retail contacts indicated that inventories were generally at comfortable levels, though some auto dealers reported that their inventories were too high. Most manufacturing contacts also said that stocks were at comfortable levels, though some indicated inventories were too low as a result of longer lead times for equipment and materials (particularly steel products). In addition, steel service center inventories remained below historical norms. Capital spending increased modestly, and contacts expected growth to continue at that pace over the next 6 to 12 months. Outlays were primarily for replacing industrial and IT equipment and for renovating structures. Some contacts indicated that they were delaying capital spending decisions until 2019 because of uncertainty over the outcome of international trade negotiations. Demand for energy from commercial and industrial users increased modestly, with the strongest growth coming from data centers and steel producers. Demand for transportation services increased moderately from an already high level. One contact noted that threats of new tariffs had led to spikes in freight traffic as businesses sought to move goods before the tariffs might take effect.

Construction and Real Estate
Construction and real estate activity increased slightly over the reporting period. Residential construction was little changed, with growth in suburban single-family homebuilding offset by declines in other markets. Homebuilders reported that rising labor and materials costs were squeezing margins and leading them to focus on higher-margin higher-end homes in spite of strong demand for starter homes. Home sales were up slightly overall, though a contact in the Detroit area reported slower sales. Contacts across the District indicated that low inventories of starter homes continued to hold back sales. Nonresidential construction edged higher from an already solid level, with contacts highlighting growth in the industrial, health, and education sectors. Commercial real estate activity increased modestly with growth spread across most segments. That said, one contact indicated that he had started seeing deals fall through because of increases in construction costs. Commercial rents increased slightly, vacancy rates edged down, and sublease space edged up.

Manufacturing production increased at a moderate rate in July and early August. Steel output increased moderately as end-user demand remained at a high level and imports declined. Demand for heavy machinery rose moderately, helped by growing demand from the construction and oil and gas sectors. Heavy truck demand continued to grow at a strong pace. Order books for specialty metals manufacturers increased modestly. Manufacturers of construction materials continued to report slow but steady increases in shipments, though there were concerns that the housing market is cooling. Auto production edged down, but remained at a solid level.

Banking and Finance
Financial conditions improved slightly over the reporting period. Financial market participants reported little change in securities prices or volatility. Business loan demand increased modestly, with growing demand from both small and middle-market firms. Contacts noted that competition for customers was particularly strong in the small business segment. Loans were primarily for financing real estate, capital equipment, and M&A. Loan quality was little changed on balance. Consumer loan demand increased slightly, led by growth in auto and home loans. Consumer loan quality and lending standards were little changed.

Overall crop yields in the District appeared set to forge a new record as the result of widespread good weather. Contacts expected a record harvest for soybeans but not for corn, reflecting the shift in the composition of crops in this year's plantings. The anticipation of large supplies and uncertainty about trade policy led to lower corn and soybean prices. Wheat prices were higher though, because of tighter world supplies. Specialty crops were generally in good shape. Hog prices were down, as tariffs led to a drop in exports. Dairy farmers continued to struggle as milk prices remained low, while egg producers benefitted from modestly higher prices. Contacts throughout the District continued to express concerns about the impact of trade disputes and tariffs on the agricultural industry, in spite of the favorable news on NAFTA negotiations and the announcement of government assistance, which contacts largely viewed as inadequate.

For more information about District economic conditions visit: chicagofed.org/cfsbc