Federal Reserve Bank of Chicago
Summary of Economic Activity
Economic activity in the Seventh District increased slightly overall in late May and June, and contacts generally expected a similar rate of increase over the next year. Employment was up modestly; business and consumer spending rose slightly; nonbusiness contacts saw little change in activity; and manufacturing and construction and real estate activity edged down. Prices were up modestly, wages rose moderately, and financial conditions loosened a bit. Prospects for 2024 farm income declined some.
Labor Markets
Employment rose modestly over the reporting period and contacts expected growth to continue at that pace over the next 12 months. Most contacts indicated the labor market remains tight, with some respondents, particularly in manufacturing, continuing to have difficulty filling higher-skilled positions. However, there were signs of cooling, with several contacts noting sizeable layoffs in the heavy machinery industry and reports of increases in the number and quality of applicants. Wages and benefits costs rose moderately, with some of the increases resulting from new union contracts.
Prices
Prices rose modestly overall in late May and June and contacts expected a similar rate of increase over the next 12 months. Producer prices moved up modestly. Nonlabor input costs continued to rise, with manufacturing contacts highlighting increases in the costs of energy and some raw materials, notably copper. Still, many contacts said overall inflationary pressures had subsided. One heavy machinery manufacturer reported that high interest rates were helping push down prices. Consumer prices again rose moderately overall, though retail contacts reported a slowdown in price growth, including flat or falling prices in a range of spending categories.
Consumer Spending
Consumer spending increased slightly over the reporting period. Nonauto retail sales were unchanged overall. Several contacts indicated that foot traffic was up more than sales. For example, a contact in the grocery industry said there were more consumers (across all income groups) shopping at multiple stores, which he interpreted as a signal of greater price sensitivity. Leisure and hospitality activity rose modestly overall. Restaurant sales grew modestly, largely driven by higher income households. Light vehicle sales moved up slightly. However, contacts said the cyberattack on CDK Global made completing transactions much more onerous and slowed the sales pace some. New vehicle transaction prices fell, incentives rose, and used vehicle prices trended lower.
Business Spending
Business spending increased slightly in late May and June. The pace of new capital expenditures ticked up, with contacts highlighting investments in HVAC units and furniture. Despite high interest rates, many contacts said they were moving forward with capital spending projects and that rates staying higher than they had expected earlier in the year was unlikely to affect their decision making. Demand for truck transportation remained flat at a low level and freight rates remained low as well. Auto dealer inventories were largely at comfortable levels, though one contact noted rising light truck inventories. Manufacturing stocks were also comfortable overall, but a heavy truck manufacturer indicated inventories were moderately elevated. There were isolated reports of supply chain issues. Several contacts said a low supply of switchgears (used for regulating the flow of electricity) was causing headaches for electric utilities.
Construction and Real Estate
Construction and real estate activity decreased slightly on balance over the reporting period. Residential construction was up some overall, though contacts noted that an increasing number of homeowners had deferred home renovations because of high interest rates. Residential real estate transactions decreased slightly, with little change in prices or rents. One contact noted that time on the market had grown. Nonresidential construction activity was unchanged, as were sales prices. Several contacts said that the industry had adjusted to high interest rates. The number of new projects was solid and unchanged, though across all segments developers of new buildings were cutting back on the size of projects and amenities. Office tenants were downsizing but updating their spaces. Demand for retail store remodeling was also solid. Commercial real estate activity decreased slightly. Prices were unchanged, rents fell slightly, and vacancy rates were unchanged. Contacts reported that several local restaurants near office buildings had closed recently because of an ongoing lack of weekday traffic. In Southeast Michigan, contacts noted ample availability of industrial floor space because of lower-than-expected battery electric vehicle production.
Manufacturing
Manufacturing demand decreased slightly on balance in late May and June. Orders for steel were down slightly, with contacts noting slower demand from construction. Fabricated metals sales were steady overall, with higher demand from utilities but lower demand from the auto industry. One manufacturer linked a significant decline in demand from the auto sector during the first half of the year to lower-than-expected electric vehicle production. Machinery sales decreased modestly, with reports of slower demand from the construction, agriculture, and aerospace industries. Auto industry contacts saw little change in demand on balance.
Banking and Finance
Financial conditions loosened slightly over the reporting period. Bond and equity values both increased and volatility was little changed. Business loan demand fell modestly, with contacts highlighting slower demand for commercial real estate loans. Rates were stable but lending terms tightened slightly. Loan quality was little changed. Contacts continued to note strong competition among lenders, especially for making loans to the most creditworthy borrowers. Consumer loan demand was down slightly, while rates were flat. Loan quality fell slightly with contacts noting some deterioration in their credit card, auto, and mortgage loan portfolios. Consumer loan terms tightened slightly.
Agriculture
Farm income expectations for the District waned in late May and June as key crop prices declined. Contacts indicated that farmers were slow to sell crops from storage and were holding back on selling ahead from their anticipated fall harvest in part because of low prices. Although recent flooding covered some acres, corn and soybean planting recovered from earlier weather-related challenges across much of the District, and overall crop conditions were off to a better start than in recent years. Corn, soybean, and wheat prices were lower, with a strong wheat harvest already underway. A contact noted that an early wheat harvest would free up fields for second crop soybeans sooner than usual, allowing the soybeans to mature for longer. Milk and egg prices were higher, while hog prices faltered. Cattle prices were flat at a high level.
Community Conditions
Community, nonprofit, and small business contacts reported little change in economic conditions over the reporting period. State government officials again saw steady growth in tax revenue. Small business intermediaries continued to speak about the hiring and retention challenges of smaller employers, including nonprofits, who struggle to compete for employees in a tight labor market. Community Development Finance Institutions (CDFIs) reported that new sources of capital were creating opportunities for investment but were also challenging the capacity of CDFIs to administer the loans and the capacity of borrowers to find skilled trades people to do the work. Although inflation has moderated, higher prices continued to be a challenge for businesses and nonprofits (especially those with narrow margins or fixed revenue streams), as well as for low- and moderate-income families. The limited supply of affordable housing remains a persistent point of concern for many contacts.
For more information about District economic conditions visit: https://chicagofed.org/cfsec.