Federal Reserve Bank of Chicago · Beige Book

Federal Reserve Bank of Chicago

Summary of Economic Activity

Economic activity in the Seventh District increased moderately overall in late February and March, though contacts expected a more modest pace of growth over the coming months. T1Labor and materials supply constraints continued to weigh on the expansion. Employment increased strongly, and consumer spending, business spending, manufacturing, and construction and real estate were up modestly. Wages and prices rose rapidly, while financial conditions tightened some. Agriculture markets experienced price increases and substantial volatility related to Russia's invasion of Ukraine.

Labor Markets

Employment increased at a strong pace over the reporting period, and contacts expected moderate growth over the next 12 months. T2Contacts across sectors reported ongoing difficulty in finding workers at all skill levels. High turnover rates continued to be an issue for some contacts, with one noting that several senior level managers resigned for permanent work-from-home opportunities at other firms. A lack of labor continued to prevent a number of firms from producing enough to meet strong demand, with one manufacturer expressing the desire to add a third shift but unable to find workers for it. Overall, wage and benefit costs increased rapidly, both to attract new workers and retain existing talent.

Still, some contacts noted that despite higher wage offers, they were unable to fill open positions due to a scarcity of applicants. Others, however, indicated they were seeing improvements in their ability to hire, which they attributed to greater labor force participation. One contact noted that although they were able to hire, new workers required more training than they had historically.

Prices

T3Overall, prices rose strongly in late February and March, and contacts expected price growth 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 labor, transportation, energy, and materials, notably metals. Consumer prices generally moved up robustly due to solid demand, limited inventories, and pass-through of increased costs. Contacts continued to indicate that they were experiencing only limited pushback on price increases from customers.

Consumer Spending

T4Consumer spending moved up modestly on balance over the reporting period. Some retailers mentioned that foot traffic picked up and attributed the change to reduced concern about COVID-19. Nonauto retail sales increased slightly. Spending on furniture, appliances, and electronics rose modestly, but grocery sales were flat. Contacts also noted an increase in sales at discount stores. Light vehicle sales volumes decreased moderately and continued to be constrained by low inventory levels; profit margins remained strong due to elevated vehicle prices. Leisure and hospitality spending increased, led by greater tourism activity.

Business Spending

T5Business spending increased modestly in late February and March. Retail inventories remained low in many sectors due to supply chain challenges. For key items, retailers were taking extraordinary measures to get inventory, including ordering earlier and using air freight. Many manufacturers' inventories were not at desired levels, with the number reporting levels as too high about the same as the number reporting levels as too low. Manufacturing contacts continued to cite shortages of a wide range of inputs and expressed concern that the COVID-19 outbreak in China could cause further supply disruptions. Transportation services continued to operate at full capacity. Growth in capital expenditures was modest, with greater spending on equipment upgrades and intellectual property.

Lead times remained lengthy for some types of capital equipment. There was little change in industrial energy consumption, while commercial energy consumption increased slightly, led by growth in office usage. Residential energy demand decreased slightly.

Construction and Real Estate

Construction and real estate activity moved up modestly on net over the reporting period. T6Contacts in both residential and nonresidential construction noted that higher labor and materials costs and rising interest rates were weighing on demand. Residential construction was up on net, with growth varying by location and segment. According to a survey of builders, single family home construction was flat, with many still limiting contract sales as they continued to navigate supply-chain bottlenecks. There were notable delays in deliveries of key items, such as windows, doors, framing, HVAC equipment, appliances, and cabinets. Multifamily construction strengthened as demand remained robust. Residential real estate activity was little changed. Inventory levels of homes for sale remained low, contributing to further increases in prices and rents.

In the nonresidential construction sector, project costs escalated, and builders reported delays in receiving steel. Nonetheless, construction increased due to strong demand in the industrial, single-tenant retail, and medical office areas. Commercial real estate activity held steady, with little movement in transaction activity, prices, or rents. There was a modest increase in the availability of sublease space.

Manufacturing

Manufacturing production increased modestly in late February and March as challenges in securing labor and materials limited production despite strong demand for many products. Shortages of microchips and other materials resulted in an outright decline in auto output. Heavy truck demand increased moderately but there was only a small increase in production, which reduced inventories and boosted prices. Steel production was flat, though demand moved up, driven in part by increased orders from energy customers. Steel prices remained high, especially for stainless steel. Manufacturers of office furniture noted that demand for new, renovated, or reconfigured office space was supporting sales. Fabricated metals manufacturers reported little change in order books overall.

Banking and Finance

T7Financial conditions tightened some on balance over the reporting period. Participants in the equity and bond markets reported rising interest rates, an increase in volatility, and net declines in asset values. Business loan demand increased modestly, with growth spread across sectors. Contacts highlighted greater usage of lines of credit to finance inventories as well as growth in acquisition financing. Business loan quality was unchanged overall, while business loan standards tightened slightly. In consumer markets, loan demand decreased slightly, led by lower demand for mortgage lending. Consumer loan quality remained unchanged on balance, while standards tightened slightly.

Agriculture

T8Agriculture markets experienced price increases and substantial volatility during the reporting period related to Russia's invasion of Ukraine. Prices for corn, soybeans, and wheat moved higher, as did input prices, particularly for fertilizer and diesel fuel. Some farmers switched to using manure as fertilizer, though availability was limited, particularly in areas without substantial livestock activity. Rising input costs led to a shift in planting plans from corn to soybeans, which require less expensive inputs. In addition, concerns deepened about whether input deliveries would be in time for planting. On average, prices for cattle, hogs, eggs, and milk were all up from the prior reporting period. Strong gains in farmland prices continued, in part because of greater interest by investors.

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