Beige Book Report: Chicago
January 27, 1988
Summary
Business activity in the District is expanding, overall, with many
manufacturers reporting strength tied to rising exports, improved
competitiveness with imports, and rising capital spending. Continued
slow car sales are partly offset by the expanding truck market.
Purchasing managers reports for District metro areas continue
robust, though our contact with the Milwaukee group was concerned
about prospects for early 1988. Employment continued to trend upward
in District states through November, but the effects of widening
layoffs, particularly in autos, cut Michigan employment in December
and probably in January. Demand for steel has shown no letup from
the strong pace of much of last year. Construction activity appears
to be holding up in the District. Several lines of consumer goods
are reported selling well, helped by cold weather and promotions.
Recent USDA reports have firmed 1988 price prospects for most
District farm commodities.
Purchasing Managers
December purchasing managers' surveys in the Chicago, Indianapolis,
and Milwaukee areas show continued expansion. The Chicago survey
indicates strong growth in production, orders, and backlogs as well
as delays in filling orders and further price increases. Activity in
the Indianapolis area is described as still moving along briskly,
with continued strength in the area's industrial sector. Orders and
backlogs continued to rise in the Milwaukee area, though increases
were not as widespread as earlier. The slower rise is thought to be
mostly seasonal, but our contact was concerned that orders placed in
response to lengthening lead times and rising prices could quickly
evaporate if the late 1987 slowdown in additions to bookings proves
to be more than seasonal.
Employment
District state' payroll employment continued to expand through
November, but the year-to-date rise trailed that in the U.S., with
slower gains concentrated in Michigan and Illinois. Manufacturing
employment in Michigan was below a year earlier, reflecting layoffs
at auto assembly and parts plants, and cuts in related industries.
With manufacturing payroll employment in Michigan showing relatively
large gains, however, total nonfarm payrolls in November were about
1% above a year earlier. The household survey also shows total
Michigan employment above a year earlier in November, but December
was lower. Sources in Michigan indicate that the weaker employment
situation in December principally reflects announced layoffs. Some
of those who reported themselves as laid off in the December
household survey are thought to have taken accrued vacation time
initially, and consequently to have been counted as employed in the
December payroll figures. Other companies in the District which have
recently announced employment cuts include financial service firms
in Chicago, and an appliance manufacturing plant in Michigan which
closed and shifted production to plants outside the District.
Corporate staffs in Chicago were cut by a large railroad, a maker of
building materials, and a diversified producer of consumer products.
GM's Electromotive Division plans to cut employment by 2,000 to
2,300 at its Chicago-area plant, one of only two U.S. plants that
build new locomotives, and shift locomotive production to Canada.
Motor Vehicles
Auto production plans have been trimmed, bringing first quarter
schedules more in line with analysts' expectations based on fourth
quarter sales trends. Announced cuts in assembly schedules are
feeding back to parts plants. In addition to temporary closings to
control inventories, five Michigan auto assembly and parts plants
were closed permanently in December. In contrast, total truck output
in the first quarter is projected at a record level, for any
quarter, in line with the strength in sales.
Steel
Demand for steel bounced back strongly following normal year-end
customer shutdowns. Lead times are strengthening, with the first
quarter booked and delivery times for orders currently placed
extending into the second quarter. Demand from appliance makers is
holding up. Structural steel fabricators generally are quite active,
though the level of activity varies considerably among geographic
areas. Sales people foresee no letup in incoming contracts. The
Chicago market is described as active with numerous small and
medium-size orders. Projects being put out for bid indicate strength
in spending on shopping centers and power plants. Warehouse
business, generally for smaller projects, was highest ever last year
and remained extremely strong through year-end. Upward price
pressures continue.
Other Manufacturing
Reports from other manufacturers are generally quite positive.
Shipments of corrugated containers in North Central states were very
strong in November, and one company's results suggest that the
industry uptrend continued in December. Seasonal closings in late
1987 at box plants' customers were described as normal, with no
extended shutdowns reported. A linerboard price increase announced
for February is expected to go through without resistance. Makers of
capital goods and equipment for installation in new construction
projects are seeing strong business. Other lines noted by our
sources as showing good gains include medical supplies, printing and
publishing supplies, abrasives used in industry and construction,
and materials for highway signs.
Construction and Real Estate
Construction activity continues at a high level in District states,
apart from the normal seasonal slowing. (Comparisons of early 1988
with year ago will appear weak because of last winter's unusually
mild weather.) Nonresidential construction contracts in District
states, in square feet, were 14 percent above a year earlier in the
first 11 months of 1987, and residential contracts were 4% higher,
both stronger performances than the U.S. Demand for building
materials, including cement and gypsum board, showed stronger gains
in the District than the nation. New high-rise buildings continue to
be announced for downtown Chicago. Paving activity will be strong in
the Chicago area in 1988. Home prices in the metro area are
estimated to be about 10% above a year earlier.
Consumer Spending
December ales were satisfactory, in the view of a major general
merchandise retailer. Sales in early 1988 started strong, helped by
cold weather as well as promotional activity. Lines showing good
gains include home improvement, household appliances, personal care,
hardware (especially cordless tools), furniture, and children's
apparel. Retail inventories are regarded as in good shape.