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Summary
The Seventh District economy continued to expand solidly in June and early July, despite a slight softening in consumer outlays. Business spending continued to rise, and hiring remained stronger than earlier in the year. Overall construction and real estate activity moved slightly higher, with strong gains on the residential side. In general, manufacturing remained strong. Lending volumes were again relatively flat. Producers' input costs remained elevated, though there were fewer reports of further increases. Retail price increases and upward wage pressures were largely subdued. Crop conditions improved in the southern portions of the District, but continued to lag and even deteriorate in the northern parts.
Consumer spending
Consumer spending softened slightly since our previous Beige Book report. Most retailers said that total sales came in below plan during June. However, a contact with one national chain said that the firm's results improved early in July and were above trend. Merchants reported that home furnishings, electronics, and lawn and garden goods were selling well, while apparel continued to lag. One retailer indicated that inventories for some product lines were too lean, resulting in lost sales. District auto dealers said that showroom traffic and light vehicle sales were slow in June. Most said that business had not improved noticeably by mid-July, but pointed out that the bulk of light vehicle sales have been taking place in the latter half of each month. A few auto dealers noted that parts and service sales had increased recently. Some contacts said that cool, rainy weather was hampering tourism activity, particularly in Wisconsin and Michigan. However, a tourism contact in Chicago said business was up from last year, and a major airline noted that bookings had risen recently in response to fall travel deals. A large regional theater chain reported that ticket and concession sales were strong in June.
Business spending
Reports generally indicated a further pickup in business spending, though many firms remained cautious. The number of firms that were increasing capital outlays continued to rise moderately. In addition, one information technology executive said there was a solid, across-the-board pickup in business technology spending. More firms reported adding to their advertising spending. Business travel was said to be rising as well. With regard to hiring, staffing firms reported that demand for temporary workers remained very strong, though year-over-year increases in new orders seemed to plateau in June. An executive with one temp help firm was confident enough in the firm's growth outlook to "fire" some of its higher-volume, but lower-paying customers. Another noted that orders for permanent hires were "pouring in the door," particularly for IT, professional, sales, and skilled-trades workers. Outside of reports from temporary help agencies, firms generally were more bullish on their hiring plans than during the previous Beige Book period. We continued to hear isolated reports of labor shortages. A dearth of truck drivers in the District seemed to intensify recently, forcing one major freight carrier to turn away new business. In addition, railroads were scrambling to hire new workers to meet rising shipping demand and ease delays.
Construction/real estate
Housing and construction activity increased again in June and early July. Contacts
reported that sales of both new and existing homes were very robust in June,
with several expressing surprise at the resiliency in demand. Many Realtors
and builders suggested that the latest surge in home purchases was spurred by
buyers' expectations for higher interest rates. Nonetheless, some homebuilders
were confident enough in the strength of underlying demand to take on new spec
projects. Overall nonresidential activity changed little since our previous
report, and remained somewhat soft. Contacts in the Chicago market reported
that an influx of new and sublease space was pushing up vacancies, and that
landlords were boosting concessions. Office markets elsewhere in the District
appeared more stable, and there were even reports of an uptick in small lease
deals in some markets. While conditions in light industrial real estate were
largely unchanged, one major development company suggested it was becoming more
aggressive in developing spec space in the region, particularly in the Chicago
and Indianapolis areas.
Manufacturing
Manufacturing activity remained strong in June and early July, and despite some stock building, inventories still were lean through much of the supply chain. Some materials producers (steel, gypsum wallboard, and cement) said that there was no letup in demand in recent months. Steel inventories were said to be up at service centers, but down at factories. Contacts in gypsum wallboard and cement said that both industries continued to run near capacity. Cement shortages, which had been limited to areas on the East and West Coasts, were spreading to other regions, including the Midwest. Producers of heavy equipment indicated that new orders continued to run well above year-earlier levels and that inventories were at all-time lows. A large producer of home appliances announced that it was recalling some furloughed workers to meet rising demand. Moreover, another large appliance maker said that strong demand was leading some retailers to increase inventories. By contrast, automakers reported that inventories jumped unexpectedly in June as light vehicle sales slumped nationwide. One producer said that its assembly plans for the third quarter were below year-earlier levels.
Banking/finance
There was very little change in the pace of financial activity in June and early July. On the household side, new mortgage originations were still strong while refinancing activity was relatively soft. Lenders reported that household credit quality continued to improve and there were no changes in loan standards and terms. Business loan volumes remained fairly flat, well below many bankers' expectations. Lenders suggested that businesses were still relying on their flush cash positions to meet liquidity needs rather than borrowing. While overall business loan quality continued to improve, there were more reports of banks compromising on covenants to attract business.
Prices/costs
Prices for some inputs, such as steel and energy, generally have leveled off, but remain elevated. While more manufacturers reportedly were adding surcharges to at least partially cover these higher costs, many others still said that competition prevented them from passing any cost increases on to their customers. One builders' association said that higher materials prices had pushed the cost of building a home up roughly 10 percent, and that builders had been able to pass along only a small portion of that increase to home buyers. At the retail level, price increases remained largely subdued due to intense competition. Regarding wages, contacts reported little change from the previous reporting period, with increases mostly contained.
Agriculture
Corn and soybean crop conditions improved in the highest producing parts of the District (Iowa, Illinois, and Indiana) as warmer weather helped make up for earlier setbacks. In Michigan and Wisconsin, however, fewer acres were classified in good or excellent condition compared to the previous Beige Book reporting period. With higher milk prices this year, more dairy producers have been able to meet loan payments and update equipment. Farmland values increased once again, with substantial demand coming from nonagricultural investors, including those seeking land for recreational uses.
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