Mixed economic conditions reported in the Midwest

Economic conditions were mixed across the Midwest in recent weeks as consumer demand remained strong and labor shortages continued, according to the Federal Reserve’s Jan. 18 Beige Book.

Economic activity in the Federal Reserve Bank of Minneapolis region expanded as employment grew. “Holiday shopping was good overall but stymied somewhat by severe winter weather,” the report stated. “Construction and real estate sectors continued to struggle.” 

Economic activity fell slightly in both the Chicago and Kansas City regions even as employment increased. Labor shortages remained an issue across the Midwest, though more firms found it easier to hire and retain workers. In the Chicago region, compensation increases were reported both to attract new employees and retain existing talent.

Consumer spending slightly increased, with some retailers seeing higher sales over the holidays. “Other retailers noted that high inflation continued to reduce consumers’ purchasing power, particularly among low- and moderate-income households,” the Fed stated. 

The ag economy continued to be strong. In the Minneapolis Fed region, ag conditions were stable at high levels as farm incomes and working capital were strong heading into the new year.  Input costs for fertilizers, chemicals and energy all fell from the previous reporting period in the Chicago Fed region. “Some contacts expressed worries about higher interest rates on farm loans,” the report stated. “Soybean prices were higher, whereas corn prices were little changed. Egg and cattle prices continued moving up, while dairy and hog prices generally continued to move down.”

In the Kansas City region, most contacts said farm income and credit conditions had improved, but others reported that drought conditions had weakened conditions for producers. “Strong real estate values continued to bolster farm finances, but increased interest rates, high production costs, challenging weather conditions and the outlook for commodity prices remained key concerns,” the report stated.  

Commercial real estate activity fell. A majority of bankers said demand for residential mortgages remained weak, and some reported that higher borrowing costs were starting to impact commercial lending. CRE was flat in the Minneapolis region as vacancy rates remained favorable in industrial and multifamily sectors but unfavorable in office space despite minimal new construction. Sales of CRE property were limited due to higher interest rates and economic uncertainty. 

Manufacturers reported that activity fell “modestly on average,” while supply chain disruptions eased in many districts. Many Chicago regional contacts said they were no longer facing supply chain disruptions. In the Minneapolis area, the wholesale prices component of a regional manufacturing index fell to slightly above growth-neutral in December, its lowest mark since the first months of the pandemic.  

Employment continued to increase “at a modest to moderate pace” in most Fed districts, even as the labor market remained tight. Many firms reported hesitating to lay off employees even as demand for their goods and services slowed, and only planned to reduce headcount through attrition if necessary.