Beige Book Report: Chicago
August 9, 1989
Summary
Several reports suggest slower growth, overall, in economic activity
in the District, with declines in some sectors. Chicago purchasing
managers indicating rising production continued in June to outnumber
those noting declines, though by a smaller margin than in earlier
months over the past two years. Orders are showing no growth,
however, and backlogs are falling. Milwaukee purchasers say
production and orders were about unchanged in June and backlogs were
beginning to soften. Manufacturing employment in District states,
seasonally adjusted, peaked in January. A number of manufacturers in
the region note a slowing in activity or orders at their firms—
slower growth for some, declines at others. Real estate markets,
both nonresidential and residential, appear to be picking up in
response to lower interest rates. Consumer spending continues
sluggish. Favorable weather has enhanced crop prospects.
Motor Vehicles
Though auto production cuts through the third quarter have been
limited, preliminary indications are that automakers will reduce
output more substantially in the fourth quarter. Sales incentives
have been enhanced further in an effort to sell excess inventories.
Expectations for 1990 sales have been revised downward. A Big Three
automaker announced a major cost-cutting program, involving
substantial reductions in white-collar staffing. Sales of larger
trucks are showing varying degrees of softness, with deliveries of
medium-duty trucks below last year and orders for heavy trucks
easing though deliveries are higher. An Indiana truck trailer
manufacturer recently halted second-shift production and laid-off
350 workers.
Machinery
Markets for a variety of types of equipment continue to expand, but
there appear to be an increasing number showing indications of
weakness. Although shipments of metal-cutting machine tools this
year have been sharply higher than in 1988, orders have trailed last
year, particularly from abroad, and backlogs have fallen since
February. Smaller pieces of earthmoving equipment used in
residential construction continue weaker, as has been the case for
many months. Softening has been noted recently in marine and
recreational vehicle markets. A maker of industrial machinery has
seen weakening in orders. On the other hand, a producer of
electrical controls and power supplies used in a wide range of types
of industrial equipment expects continued strength in these markets
through year-end. Markets for mining equipment are strong, including
robust demand from abroad. Road maintenance equipment buying is also
strong. Demand for agricultural equipment continues to improve.
Construction
Lower mortgage interest rates reportedly are generating a pronounced
upturn in inquiries and loan applications, both commercial and
residential. Part of this increased activity reflects refinancing by
current property owners, including shifts from adjustable-rate to
fixed-rate loans. Part is expected to give rise to added
construction. Thirty-year fixed-rate residential loans are being
offered in the Chicago area generally in a 9.5-9.75 percent range,
down from 10.75-11 percent common in March. Measures of construction
activity continue stronger in this part of the country than
nationwide. Year-to-date shipments of portland cement, for 5 months,
were 5 percent higher in the East North Central states and 1 percent
lower in the nation. Year-to-date gypsum board shipments were 8
percent higher than a year earlier in District states, against only
a 4 percent rise nationwide. Nonresidential and residential
construction contracts are above a year ago in District states and
lower nationwide, suggesting relative strength in future
construction activity in this region.
Steel
Demand for steel has slowed, but perhaps mainly seasonally. There
appears to be an unusual concentration of shutdowns among the steel
industry's customers in July. Unwinding of inventories accumulated
earlier, to guard against the risk that negotiations over expiring
labor agreements at steel mills might have been unsuccessful and led
to strikes, is also thought to have contributed to slackened demand
for steel. Planned auto production and related demand for sheet
steel is strong again in August, following July shutdowns, but
production cutbacks expected at automakers later this year would
curtail this market for steel. Construction markets for steel were
strong in the first half, and additional projects are coming up for
bidding, but some other projects have been delayed for various
reasons. Machinery markets for steel, as noted above, are turning
increasingly mixed. Steel exports in 1989 have been up sharply, from
a very low level, while imports have declined.
General Merchandise
A large retailer noted weakness in sales of durables, particularly
furniture and draperies. Appliance sales are holding up a little
better. Sales growth in nondurables, mainly apparel, has increased
after weakness last year. A June survey of a large number of small
Michigan retail stores indicated that year-to-year sales increases
were only about keeping pace with the rise in prices.
Agriculture
Widespread rains and cooler-than-normal temperatures since mid-July
led to enhanced harvest prospects and lower crop prices. Since the
favorable weather occurred during the critical pollination period,
corn yields this year are now expected to equal, or exceed, the
average for non-drought years. Prospective soybean yields, while
benefiting from rapid plant growth recently, still hinge heavily on
weather patterns during the pod-filling stage in August.
Preliminary results from our latest survey of District bankers suggest that farmland values continued to edge up in the second quarter, but at a slower pace than in earlier periods. The second quarter rise of 1 percent compares to gains of about 3 percent in each of the previous three quarters. The slowing was particularly evident in Illinois and Iowa where lingering drought concerns prevailed throughout the second quarter.