Beige Book Report: Chicago
August 3, 1987
Summary
Business activity in the Seventh District continues to expand.
Contacts appear more optimistic about the near-term outlook.
Purchasing managers in Chicago and Milwaukee reported further
improvement in June. Total employment growth in District states from
the end of 1986 to May about equaled that in the U.S., seasonally
adjusted. District steel mills are operating at capacity for some
products and at high levels for others. In response to slower car
sales and high inventories, auto makers have cut production, but
truck sales and output are strong. Contacts continue to report
rising demand for some types of business equipment. Nonresidential
construction is slowing in some areas, including Chicago suburbs,
but continues strong in downtown Chicago and in Michigan.
Residential construction has trailed 1986 since the strong first
quarter, and the rest of 1987 is projected at a high level but below
last year. Retail sales of seasonal merchandise have been boosted by
hot weather, and home improvement products are also reported selling
well. Farmland values are edging upward, reversing a six-year
decline.
Purchasing Managers
Chicago and Milwaukee purchasing managers' reports show continued
expansion in activity through June. Both groups report further
increases in output, orders, and inventories, accompanied by rising
prices. The Chicago report indicates slower growth of orders than
earlier in the year with backlogs and employment unchanged after
earlier increases. Milwaukee, in contrast, saw faster growth of
orders and backlogs, and rising employment. Both reports have been
more favorable this year than in 1985 and 1986, with the improvement
particularly sharp in Milwaukee.
Steel
Chicago-area steel mills are operating at capacity for sheet
products used in the automotive, appliance, and construction
industries. Production of structural steel has slowed but by less
than usual in the third quarter. The market for steel plate has
tightened. Steel service centers have been setting sales records.
Price increases have continued to be reported for various steel
products, reflecting improved demand from some sectors, rebuilding
of low inventories, lower imports in response to higher prices for
foreign steel and the Administration's trade restraint program, and
cuts in domestic steelmaking capacity due to plants being closed in
recent years and not reopened.
Motor Vehicles
As expected, extended shutdowns for model changeovers are being
scheduled in the auto industry to cut inventories. Car sales have
continued to trail last year's levels. Permanent as well as
temporary cutbacks in auto production are having a particularly
sharp impact on industrial activity in southeast Michigan, where the
industry is heavily concentrated. However, a knowledgeable contact
thinks forecasts of a Michigan recession with double-digit
unemployment in 1987 or 1988 are unduly pessimistic. Buyers continue
to substitute vans and other light trucks for cars. Sales of heavy
trucks are strong. A supplier projects a 16 percent rise in
production of heavy trucks this year, to 4 percent above 1985. In
contrast with cutbacks in car output, an Indiana truck plant is
adding a second shift and 1,100 workers. Unions are expected to
emphasize job security in negotiations on new contracts in the
industry; management is expected to prefer bonus or profit-sharing
plans over increases in base pay.
Equipment
Reports indicate rising demand for various types of equipment, but
continued weakness in other lines. A producer of diesel engines is
working overtime to fill orders from truck makers, and backlogs have
increased. Demand for diesels from other sectors is a little
stronger, except from makers of farm equipment. A steel supplier is
seeing increased orders from makers of railcars (up from a very low
level), construction equipment, and pressure vessels used in the
chemical process industry. Buying of machine tools, volatile from
month to month, remains weak, hurt by auto industry cutbacks.
Nonresidential Construction
Contracts for construction of nonresidential buildings in the
District, in square feet, during the first half of 1987 were about
even with last year. A further sizable rise in Michigan was about
offset by a large decline in Illinois. Commercial construction
continues strong in downtown Chicago. New large buildings continue
to be announced, additional structures are being planned, and more
announcements are expected. Commercial building has slowed
substantially in Chicago suburbs. A steelmaker notes an upturn in
buying of pipe for use in oil and gas well drilling, and strength in
construction of gas pipelines.
Residential Construction and Sales
Construction contracts for residences in the District states during
the first half were above a year earlier, in contrast with the U.S.,
which was lower. However, the rise in the District was entirely in
the first quarter, helped by unusually mild weather. Higher mortgage
interest rates since late March and uncertainties over possible
future rate declines have caused potential home buyers to wait.
Mortgage rates have eased since May, to 10 percent or a little
lower, for 30-year fixed-rate loans. Inventories of used homes for
sale in the Chicago area are low, and lending activity has slowed. A
number of housing projects are expected to start soon in this area.
Residential building for the rest of the year is expected to stay at
a high level but below 1986.
Retail Chain Store Sales
Exceptionally hot weather has encouraged buying of seasonal
merchandise, according to a contact at a large retailer. Sales of
home improvement items have been doing well. Higher prices,
particularly for women's and other apparel, have added to the dollar
volume of sales. These higher prices are attributed less to the fall
in the dollar than to bilateral trade agreements sharply limiting
growth of U.S. apparel imports from Asian countries.
Agriculture
Preliminary results from our latest survey of agricultural banks
show that, on average, District farmland values rose about 1.5
percent in the second quarter. Banks from each of the five District
states reported on increase. This marks the second consecutive
quarter of modest increases, reversing the six-year slide that
extended through 1986.