Beige Book Report: Chicago
August 2, 1988
Summary
Most reports on business activity in the District indicate continued
strength. So far this year, total payroll employment in the five
states has trended upward at a somewhat slower pace than in the
nation, mainly due to first quarter layoffs at auto makers and
suppliers. Production cuts and stronger sales cleared excess car
inventories, and were followed by increases in production.
Purchasing managers in Chicago reported strong gains in activity
through June, with widespread price increases. Reports are similarly
robust from contacts in various industries, with the main exception
being office and residential construction. Steel demand continues
strong, reflecting the rise in auto production, improved markets for
a wide range of equipment, and vigorous demand for construction
steel reflecting in part rising industrial construction. Severe
drought, relieved by scattered rains in mid-July, has
caused serious problems for many farmers and adversely affected
agricultural suppliers. Production cuts, or the possibility of cuts,
resulting from low water supplies have been reported in a few other
industries, including papermaking and petroleum refining, but do not
appear to be widespread.
Motor Vehicles
Sales of cars have exceeded the expectations of many forecasters.
The first half sales rate outpaced sales in all of calendar year
1987, though trailing 1986. Inventories are in good balance.
Production is expected to stay relatively strong in the second half.
Truck sales have trended upward and are likely to exceed 5 million
units, a record, for all of 1988.
Steel
Production of steel is slowing in the third quarter to allow for
needed maintenance and to keep output in line with seasonal
slowdowns at customers' plants. Robust orders should support a high
level of output over the rest of the year. Sales at steel service
centers, which have been growing very strongly, are slowing less
than usual at this time of year. Shipments of steel to motor vehicle
makers are expected to stay strong. Purchasing by other consumer
goods makers is holding up well. Demand from some equipment makers
is the strongest since before the 1981-82 recession. Orders for
construction steel continue robust, overall, helped by the upturn in
factory construction.
Equipment
Manufacturers of various types of equipment are seeing good demand
for their products. Some machinery makers report double-digit
increases in orders and backlogs, with particularly large increases
in sectors which had been depressed. Orders for metal-cutting
machine tools this year have been about double the year-earlier
pace, though still well short of the high levels of the late 1970s
and 1980. The upturn is broad-based and inquiries suggest that
further gains in orders are likely. Railcar orders are up sharply
after having been very depressed since collapsing in the early
1980s. A lift truck manufacturer is shifting some production from a
European plant to Illinois. Makers of other materials handling
equipment, food industry machinery, and other types of business
equipment have seen sizable gains in orders. Demand is described as
very good for various types of fabricated metal parts. Consumer
goods sales are holding up well, including appliances as well as
other types—buying of boat trailers, for example, is quite strong.
However, there are indications that the recent strengthening in
agricultural equipment is starting to abate.
Construction
Construction activity in the District this year is at a fairly high
level but shows signs of slowing. Contracts for residential
construction (measured in square feet) in the first five months were
15 percent below a year earlier in the five states. The sharpest
year-over-year declines occurred early in the year, reflecting
adverse weather, but contracts in the spring continued below a year
earlier. Pouring of concrete at Chicago-area residential
construction sites this summer is reported to be at a good pace but
below last spring despite favorable weather. Nonresidential
construction contracts in the first five months were 5 percent lower
in District states. In contrast, shipments of gypsum board in the
District states for five months were 1 percent higher than last
year, reflecting finishing work on structures begun earlier. Chicago
office building construction, still at a high level, is described as
having slowed somewhat, bringing the market for office space into
better balance. The industrial real estate market and construction
of factories and warehouses have strengthened. Work on highways and
streets in the District will be strong this year.
Agriculture
With no respite until recently from extremely dry and hot
conditions, prospects for this fall's crops deteriorated sharply.
Hot weather throughout much of the Midwest, coinciding with the
start of the pollination state for the corn crop in early July,
inflicted irreversible damage. Estimates of the resulting reductions
in per acre yields, however, are still subject to considerable
uncertainty. Scattered rain and cooler temperatures beginning in
mid-July appear to have halted the deterioration in corn condition
ratings in much of the District. Soybeans remain under stress but
the improved weather will temper the overall decline in production.
During June, most of the irreversible damage was concentrated on
spring wheat, barley, oats, and hay. In addition, the grazing
capacity of range and pasture land was seriously depleted and
vegetables in the Great Lakes region, an important source of
processing supplies, were hit hard.