Federal Reserve Bank of Chicago · Beige Book

Federal Reserve Bank of Chicago

Summary of Economic Activity

T1Economic activity in the Seventh District increased modestly in late November and December, and contacts expected a similar pace of growth over the coming months. Labor and materials supply constraints as well as the spread of COVID-19 continued to weigh on the expansion. Employment, consumer spending, and business spending grew modestly; manufacturing was up slightly; and construction and real estate was flat. Wages and prices rose rapidly, while financial conditions were little changed. Agricultural incomes were strong for 2021.

Employment and Wages

Employment increased at a modest pace over the reporting period, and contacts expected growth to pick up over the next 12 months. T2Contacts across sectors reported persistent difficulty in finding workers at all skill levels. In addition, contacts noted some new hires did not show up on their expected first day or quit soon after. Many businesses continued to limit operating hours because of labor challenges, especially in the restaurant, retail, and manufacturing sectors. T3Rising COVID-19 cases led some companies to further delay plans to return to in-person work, and there were reports of business closures after COVID-19 exposures forced a large number of workers to quarantine. Some contacts expressed concern about the potential of vaccination requirements to limit labor supply.

T4Overall, wage and benefit costs increased robustly. A scarcity of applicants for open positions led numerous contacts to raise wage offers, yet not all were successful in filling open positions. To retain workers, many employers increased the frequency of pay raises. Furthermore, contacts said they were giving larger-than-usual raises and year-end bonuses to account for inflation or share healthy profits with workers.

Prices

T5Overall, prices rose rapidly in late November and December, and contacts expected price increases to continue at a strong pace over the next 12 months. There were large increases in producer prices, driven by pass-through of higher costs for materials, labor, and transportation. However, contacts noted that some input prices, particularly for energy and certain steel products, had stabilized after very large increases earlier in the year. Consumer prices generally moved up robustly, with contacts pointing to solid demand, limited inventories, increased costs, and a greater ability to pass cost increases on to customers as sources of the higher prices.

Consumer Spending

Consumer spending increased modestly from a high level over the reporting period. Holiday spending met or slightly exceeded forecasts. Nonauto retail sales increased moderately, with contacts noting greater spending on groceries and pet supplies, as well lumber and building materials. Sales remained elevated in the apparel, furniture, and appliance categories. Thrift and discount stores also reported strong sales. Consumer electronics were a clear "laggard" according to one contact, decreasing modestly amid tight inventories. Light vehicle sales were little changed. Although vehicle inventories were modestly up, low levels continued to limit volumes. Dealer profit margins remained strong, reflecting both high vehicle prices and increased service department activity. Leisure and hospitality activity was flat overall, though restaurant spending increased modestly.

Business Spending

Business spending increased modestly in late November and December. T6Retail inventories remained at low levels in numerous sectors due to domestic and international supply chain challenges, and contacts expected the issues to persist into the second half of 2022. Manufacturing inventories changed little and were still tight, with shortages of a wide range of inputs, most notably certain metals, chemicals, and electrical components. Demand for transportation services remained high, even as many contacts reported continued domestic and international shipping delays and elevated cargo and freight rates. Capital expenditures increased moderately, with contacts highlighting technological upgrades (such as new automation equipment) and facility expansions. Contacts expected a similar increase in capital expenditures over the next twelve months. Residential and commercial energy consumption increased slightly, notably in leisure and hospitality, while industrial consumption decreased slightly.

Construction and Real Estate

Construction and real estate activity was little changed relative to the previous reporting period, though contacts said there were more projects in the pipeline. Residential construction was flat, while residential real estate activity decreased slightly. One real estate contact indicated that uncertainty surrounding the economy and the pandemic contributed to the slowdown. Home prices and rents increased modestly. Nonresidential construction was steady over the reporting period. Contacts indicated that long lead times and labor shortages persisted. Commercial real estate increased slightly, with activity in the industrial and multi-family sectors continuing to outpace that of the retail and office sectors. Sales and prices were up slightly for commercial properties. Commercial rents and vacancy rates were unchanged, though the availability of sublease space edged up.

Manufacturing

Manufacturing production increased slightly in late November and December, with many contacts reporting growth in order backlogs. Despite strong demand for the majority of manufacturers, ongoing capacity constraints due to challenges securing inputs, particularly labor, limited production gains. Auto output rose only slightly, as assemblers and suppliers continued to face shortages of microchips and other materials. Demand for heavy trucks picked up on top of an already strong level, but production of new trucks held steady, leading to higher prices for used trucks. Contacts reported little change in overall steel demand, which stayed strong. There was a small increase in steel availability as capacity utilization ticked up. Demand for building materials was flat at a high level, supported by solid orders for commercial and residential construction.

Banking and Finance

Financial conditions were unchanged on balance over the reporting period. Business loan demand increased slightly, notably for commercial real estate, equipment, and commercial lending. One contact also reported increases in business loan refinancing. Business loan quality decreased slightly, while standards loosened slightly. In consumer markets, loan demand was unchanged on balance, as were loan quality and standards.

Agriculture

T7High prices and bumper corn and soybean harvests led to strong agricultural income in 2021. Agricultural lenders reported few issues with credit quality. Expectations are for income to be lower in 2022 than in 2021, as recent growth in input prices outpaced growth in agricultural goods prices and farmers expected the trend to continue. More crop farmers than typical applied fertilizer on fields during the fall because of expected cost increases and questions about future availability. Contacts also voiced concerns about pricing and availability of other inputs, with a jump in forward contracting to ensure supplies for 2022. Prices for corn and soybeans rose during the reporting period, supported by weather problems in South America and a pickup in ethanol production. Prices for cattle, hogs, eggs, and dairy products moved higher. Farmland prices stayed on a rapid upward trend.

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