Beige Book Report: Chicago
October 27, 1987
Summary
Business activity continues to expand in the Seventh District,
restrained by the slowdown in the auto industry. Chicago purchasing
managers report vigorous growth in September, accompanied by further
price increases, and are optimistic about the outlook for business
activity over the next six months. Milwaukee purchasers see further
strengthening, particularly in orders and backlogs, with some hedge
buying thought to be taking place to beat rising raw materials
prices. The impact of auto production cuts, in response to slow
sales, has been particularly sharp in southeast Michigan, and
further cutbacks are planned by year-end. Nonresidential
construction has remained relatively strong in the District.
Residential building in the District is also outpacing the national
demand for steel has shown the most broadly based strength since
1981. Consumer spending reports are mixed. The District's corn and
soybean harvests are ahead of the usual pace. Pork production is
expected to rise through 1988.
Motor Vehicles
The strike at Chrysler Canada, settled after 6 days, halted
production at one District plant and reduced output at another for
one to two weeks. However, agreements were reached on contracts at
Ford in the U.S. and Canada and at GM in the U.S. with no
interruption of output. Although third quarter sales incentives and
production cuts brought car inventories down substantially, the
restrained response of buyers to the incentives is a source of
concern for the fourth quarter. Truck sales continue strong, but the
District's share of U.S. truck assemblies is considerably smaller
than its share of cars. In September, a southeast Michigan truck
assembly plant eliminated its second shift, indefinitely laying off
2,000. Closings of two motor vehicle plants in southeast Michigan
are planned by year-end. In contrast, a Japanese car assembly plant
began production in September in that area. Two more assembly plants
are being constructed in Illinois and Indiana. Heavy truck sales
remain well above last year's pace, and also well above long-run
replacement needs according to an industry analyst. Further small
increases in sales of medium and heavy trucks are projected for
1988.
Nonresidential Construction
The pace of nonresidential construction continues relatively
vigorous in the District. Contracts for nonresidential buildings, in
square feet, were 10 percent above a year earlier in the District
states during this year's first 8 months. Contracts for construction
projects other than buildings, in dollars, were 15 percent higher.
Construction activity continues at a high level in downtown Chicago.
Additional large office buildings have recently been announced.
Office construction has slowed in Chicago suburbs but remains at a
high level, and light industrial building has picked up. Plans for
auto parts plants have been announced for Illinois and Michigan to
supply new Japanese assembly plants. Paving activity is expected to
be strong in parts of the District this fall. Sections of the large
construction project at O'Hare Airport are being pushed to
completion.
Steel
The strength in steel demand is described as the most broadly based,
in terms of product types, since 1981. Steel buyers and service
centers reportedly are trying without success to add to stocks,
reflecting demand for some types of steel near production capacity,
and uneconomic mills not reopened or being renovated. Prices have
been raised for most types of finished steel. Sharply higher prices
for steel scrap reflect shortages at Chicago-area mills which have
been buying scrap from other steel districts. Steel imports are
expected to decline. Mills producing for the auto industry are
booked to year-end and running behind schedule.
Other Manufacturing
Markets have improved considerably for abrasives and other "low-
tech" products widely used in industry. Demand in the Midwest
continues strong for paperboard. A box price increase went into
effect in September with little resistance. Reflecting relatively
good construction markets in the Midwest, cement shipments to
District states have shown stronger gains from a year ago than the
nation. Shipments of electrical equipment for installation in
nonresidential buildings are expected to be strong in the fourth
quarter. Export markets for large construction equipment remain
restrained by the limited number of big projects around the world. A
home appliance maker and a producer of ball bearings are shifting
production out of the District to plants in other states with lower
labor costs.
Residential Sales and Construction
Residential building permits in District states during the first 8
months of 1987 were about even with a year earlier, but have been
below last year since April. Contacts reported an upturn in Chicago-
area home buying and loan applications in August, prior to the
September round of mortgage interest rate increases which appears to
have pushed activity down again. The August rise was attributed to
action by former "fence sitters" who had delayed buying and
financing decisions following the spring upturn in mortgage interest
rates. Mortgage interest rate volatility is viewed as more of a
problem than somewhat higher but stable interest rates, because
interest rate uncertainty causes would-be buyers and sellers to
wait. Chicago-area mortgage interest rates have risen further over
the past month, with 30-year fixed-rate loans commonly quoted at
rates of 11 percent or higher. Sources also report an upturn in the
number of Chicago-area mortgage bankers looking for jobs.
Consumer Spending
A large retail chain reports that sales in Illinois and Michigan
remain fairly high, up from earlier this year. Iowa, which had been
weak, continues to show improvement. Another large retailer located
in the District indicated sizable sales gains from low year-ago
levels, but not much strength in the seasonally adjusted trend in
recent months. Gains from a year ago in apparel sales reflect in
part the sharp rise in prices of imported clothing. Appliance sales
were reported strong in September at this retailer, after showing
less strength in July and August, but have tailed off in early
October.
Agriculture
The fall harvest continues at a rapid pace in District states. Some
63 percent of the soybean acreage and 43 percent of the corn acreage
had been harvested as of October 4, two to three times the normal
progress for that date. Pork production which turned above year-
earlier levels in the third quarter, will likely record sizable
gains throughout 1988. Hog numbers in the ten major producing states
are up 9 percent from a year ago and producer intentions point to an
8 percent rise in farrowings over the next six months. Somewhat
larger increases are reported for Iowa, but the gains for Illinois
and Indiana are smaller than elsewhere.