Bloomberg News

U.S. Federal Reserve Beige Book: Chicago District (Text)

June 06, 2012

The following is the text of the Federal Reserve Board’s Seventh District-- Chicago.

SEVENTH DISTRICT--CHICAGO

Summary. Economic activity in the Seventh District continued to expand at a moderate pace in April and May, although at a touch slower rate than during the prior reporting period. Many contacts remained cautiously optimistic in their outlook for the U.S. economy. Several, however, also noted an increase in economic uncertainty, pointing to weaker business conditions in Europe and Asia and the upcoming elections in the U.S. Growth in consumer spending slowed, while business spending continued to increase at a steady pace. Manufacturing production also rose at a steady pace, and construction activity increased as well. Credit conditions were little changed on balance. Commodity prices moved lower, and wage increases remained moderate. Planting of corn and soybeans was well ahead of the normal pace and that of a year ago.

Consumer spending. Consumer spending increased at a slower rate in April and May. Retailers indicated that the slower sales pace was due in large part to the unseasonable weather that had boosted activity during the prior reporting period. Spending on necessities increased, while outlays for big-ticket items like furniture, appliances, and electronics decreased. Inventories generally were at more seasonally appropriate levels. Looking ahead, some retailers are planning to add to inventories in expectation of a better back-to-school season than last year. Auto sales were flat, and auto dealers expect that sales will remain at about this pace through the fall. Some dealers continued to report difficulty in stocking popular models because of supply chain constraints.

Business spending. Business spending continued at a steady pace in April and May. Inventories generally were reported to be at comfortable levels. Strong expected sales growth, high rates of capacity utilization, and the need to replace aging equipment continued to support manufacturers’ expenditures on plant and equipment. Outside of manufacturing, firms were more cautious in their capital spending, citing increased economic uncertainty. Labor market conditions were little changed over the reporting period. Hiring remained selective, and most contacts indicated that they had not changed their hiring plans. Some manufacturers were increasing overtime, but noted that orders were not yet strong enough to necessitate adding to their labor forces. Those manufacturers who were looking to hire continued to report difficulty in finding skilled workers. Several said they were easing job requirements, using internships, or increasing college recruiting to try to fill open positions.

Construction/real estate. Construction and real estate activity increased in April and May. Demand continued to be strong for multi-family construction, especially apartments, but also increased for single-family homes. The residential rental market strengthened, with rents rising further and one contact noting a shortage of single-family properties for lease in parts of the District. Realtors indicated that they were also beginning to see a pickup in demand in the for-purchase market for single- family homes, as more sales had multiple offers on them. Commercial real estate conditions also continued to improve gradually. Demand increased for urban office space, hotels, and education facilities, while it remained weak for suburban office and retail space. Vacancy rates edged lower, but remained elevated, particularly for retail properties. A contact noted, however, that some suburban retail space was being switched over to alternative uses.

Manufacturing. Manufacturing production increased at a steady pace in April and May. Capacity utilization in the steel industry reached its highest level since the end of the recession, as stronger demand from North American customers offset weaker demand from Europe and Asia. The auto industry remained a source of strength for manufacturing. Auto suppliers were operating at high levels of capacity utilization, but noted that production growth had stabilized after the large gains earlier in the year. Demand for heavy equipment, though still strong, decreased slightly. Contacts expressed some concern over current weakness in global demand, but indicated that the industry was still being boosted by domestic demand, notably by a robust rental market and continued strength in the energy and mining sectors. Agricultural and construction equipment were also noted as areas of strength, with dealers adding products for the upcoming construction season. Manufacturers of household goods and building materials continued to experience soft demand, although a few noted a recent pick-up in activity.

Banking/finance. Credit conditions were little changed on balance from the prior reporting period. Credit spreads and market volatility edged up. Business loan demand remained limited apart from steady growth in refinancing and capital replacement. For large banks, some of the weakness in the business loan segment has been offset by an increase in demand for other services, such as foreign exchange hedging and liquidity management. Banking contacts indicated that there continues to be fierce competition among lenders for creditworthy borrowers. Contacts also noted an increase in the availability of credit for commercial real estate and consumer auto loans, while lending standards for residential mortgages remained tight.

Prices/costs. Cost pressures leveled off in April and May. Steel prices softened, with one contact noting that weaker demand in Europe and Asia had contributed to the decline. Energy prices also moved lower. Wholesale price pressures eased some, most notably for cotton and dairy products, although transportation costs continued to increase. Retailers indicated that they were largely absorbing the higher transportation costs in their margins and continued to discount heavily items such as clothing. Wage pressures continued to be moderate, although many contacts noted an increase in healthcare costs.

Agriculture. District corn and soybean planting in April and May were well ahead of last year’s pace, as well as the five-year average. Corn planting was almost finished in Illinois, Indiana, and Iowa. The emergence of corn and soybean plants generally was also faster than typical. With an early and promising start, the corn crop may set a record this year, although dryness currently exists across much of the District. Corn and soybean prices fell during the reporting period, while wheat prices rose. Milk prices decreased, and prices are low enough to trigger some concerns about margins for dairy operations. Hog and cattle prices were higher.


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