Beige Book Report: Chicago
June 24, 1986
Summary
Expansion in activity in the District apparently is continuing, but
still trails the nation. Respondents report consumer products doing
better, but industrial markets disappointing. The strongest sector
is housing, which is booming in most areas. Sales of related
consumer goods, including appliances and home furnishings, are also
strong. Auto sales are at a high level, but not growing, and imports
have made further inroads into auto markets. Office and retail
construction continue vigorous. Contracts for nonresidential
building are about even with last year. Demand for gypsum board,
cement, and other building materials is very strong. Capital goods
generally remain weak. Steel shipments are about flat. Crop planting
conditions were favorable, and abundant moisture will get crops off
to a good start, suggesting continued downward pressure on grain
prices.
Housing
Residential construction, both homes and apartments, remains strong.
Housing starts are sharply higher than last year. Resales of
existing homes continue at very high levels, but the rise may be
slowing. The surge in new loan applications and refinancings, in
response to the lower mortgage rates, has caused major processing
problems for area lenders and appraisers, and substantial delays in
closings. The rise in mortgage interest rates in the past month
appears to have accelerated refinancings by those who think they may
have "missed the bottom." Fixed-rate, 30-year mortgages commonly are
around 10.5 percent, compared with under 10 percent earlier this
year. Some lenders are quoting several sets of rates and points,
with higher rates corresponding to lower points and vice versa.
Strong demand has pushed housing prices significantly higher in some
favored areas. Realtors report instances of two or more buyers
bidding for a house above its list price. Production of mobile homes
has been higher than a year ago in the District, mainly in Indiana,
in contrast with a decline for the U.S.
Nonresidential Construction
Additional office buildings continue to be announced for the Chicago
area, despite substantial vacancies and large concessions to new
tenants. Office construction activity remains at a high level,
especially in Chicago and Indianapolis. Scattered strikes have
disrupted work in Chicago. (Strikes have been uncommon in recent
years.) Retail construction is vigorous in suburban areas where
population has been rising. Concessions are offered on retail
leases. Some expect the pace of leasing to slow by year-end. Demand
for small to medium-sized industrial buildings, particularly multi-
use structures, is strong in some Chicago suburbs readily accessible
to major highways. Contracts for nonresidential construction,
District-wide, are about flat. Highway and public works activity are
expected to be up this year from an improved level. Skilled building
trade workers are in short supply. Many such workers retired or left
the District in recent bleak years. Some are said to be returning in
response to contractor appeals. A major supplier to ready-mix
cement, which cut capacity a few years ago, reports shortages of
trucks and drivers.
Steel
Orders for steel have slipped recently, and output appears likely to
remain flat, slightly above last year. Strongest markets are
galvanized sheet, especially for motor vehicles; structurals and
other contractors' products; and a variety of consumer goods. But
"one-third of the economy is missing," meaning most heavy capital
goods, utilities, and oil, and gas development. Steel imports are
lower than last year but still substantial. Part of the decline in
imports reflects the collapse of oil country tubular goods. Steel
producers are still losing money. Efforts to raise prices have
failed. Cost-cutting continues, including labor costs. One producer
is transferring production of structural steel to Chicago from
Pittsburgh. The same company has started a new continuous caster at
a Chicago-area plant with 3.3 million tons of annual capacity.
Inventories are under control, with managements determined to keep
them under control.
Motor Vehicles
The pace of auto sales this year has been near last year's level,
with imports accounting for a larger share. More aggressive
incentive programs and modest production cutbacks by auto makers
appear to have brought domestic inventories back into overall
balance. Stocks of imports are generally lean. Sales of light trucks
also have been boosted recently by incentive programs. Heavy truck
sales remain soft, and will be 15 percent lower this year than in
1985, according to one industry observer.
Capital Goods
Demand for most mechanical capital goods remains weak. Consolidation
of facilities and firms continues. A District manufacturer of heavy
cranes sold that division to another heavy equipment maker. Another
firm is selling a majority interest in its construction equipment
business to a Japanese competitor, which will close the division's
headquarters in the District and a manufacturing plant elsewhere.
Railroad and farm equipment are down from last year's dismal levels.
Additional layoffs, extended summer shutdowns, and plant closings in
3 District states have been announced by farm machinery makers. Oil
and gas development equipment has fallen very sharply. Diesel engine
demand is below expectations. Buying of lighter construction
equipment has risen with home building. Food processing machinery
also is higher.
Consumer Spending
A leading general merchandise retailer reported that sales in May
showed the largest gain over a year earlier in 1 1/2 years. Other
chains' results also are improved. Inventory levels are about
normal. Delinquency rates on credit sales are high but stable. Major
home appliance shipments continue to set records, and industry
observers expect continued strength. Airline travel is above last
year's level but by a smaller margin than earlier in the year.
Michigan sources note increased construction activity to meet
demands related to increase travel and tourism. An industry analyst
projects a 10 percent rise this year in auto miles driven, which
would boost demand for a wide range of travel-related products and
services.
Agriculture
Spring crop plantings in the District are winding down on schedule.
A favorable planting season and abundant moisture reserves will get
crops off to a good start for the critical summer growing months.
Despite less acreage, the consensus is that the 1986 crop harvest is
again likely to exceed commercial market needs and add to already
burdensome (price-depressing) stocks of grain. District pork
producers have benefited from a rise in hog prices in recent weeks.
Cattle prices remain at depressed levels, in part because of the
heavy movement of animals to slaughter following the start of the
whole-herd dairy buy-out program in April.