Beige Book Report: Chicago
January 24, 1990
Summary
Manufacturing activity in the Seventh District is showing signs of
an auto-related slowdown, while other sectors of the District's
economy continue to make slight improvements. Retailers report a
high volume of sales in December, particularly in the final week.
Auto sales improved nationally throughout December and into early
January, as renewed promotional activity finally began to influence
buyer decisions. Steel producers cited a stretching out of orders
from the auto industry, but most other markets remain firm. Several
reports from equipment producers cite a slowdown in shipments, with
growth expected to remain positive. Although unseasonably cold
weather slowed construction activity in December, backlogs remain
relatively strong in the District. A consensus outlook of 24
business economists shows steady improvement in the economy this
year, after a weak fourth quarter last year.
Consumer Spending
General merchandise sales in the District grew slightly faster than
the national average during December, according to several reports.
Sales among discount chains were hampered by heavy discounting at
conventional department stores during the last few weeks of the
Christmas shopping season. However, sales at discount chains
rebounded sharply in the week after Christmas. Sales volume at one
discount chain was reported to be better than expected, up slightly
from 1988's growth pace. Sales growth was concentrated in urban
areas of the District. Earlier concerns of excess inventories going
into 1990 have been eased by strong sales last month, but
inventories are high in some areas, notably apparel and household
goods. Better-than-expected sales overall in early January, along
with order reductions in problem areas, are expected to be
sufficient to ease inventory problems early in the first quarter,
according to one industry contact.
Motor Vehicles
Total auto sales nationally hit a 10 million unit annual rate in the
last ten days of December, according to an industry economist, as
sales promotions finally began to boost dealership traffic. Early
reports for the first ten days of January suggest a continuation of
sales at near a 10 million unit pace. If this sales pace continues
through January, one industry economist expects that production
cutbacks already announced should be sufficient to eliminate the
industry's inventory overhang. The effects of worker layoffs in
January will have a sizable impact on District employment, with over
half of an expected 115,000 layoffs concentrated in the District. In
addition, a Michigan utility reports that during December electrical
power consumption by industrial customers, led by auto producers,
dropped sharply.
Steel
The steel industry shipped 20 million tons of steel in the fourth
quarter of last year, according to an industry economist, pushing
shipments for the year about 1 percent above 1988. However,
shipments were sliding throughout the fourth quarter, reflecting
primarily a slowing of shipments to the auto industry. Orders for
the first quarter of this year indicate a reversal of this pattern,
with shipments starting weak and gradually improving. According to
one respondent, the auto industry has not cut orders, but has spread
existing orders over January and February. Demand for steel from
other markets, including machinery, construction, and steel service
centers, is reported to be doing well.
Equipment
Producers of business equipment generally reported continued slowing
in activity, with some segments showing signs of bottoming out last
month. A producer of heavy equipment reports that sales of
construction equipment continue to weaken and sales of mining
equipment have started to slow, with the notable exception of coal
mining equipment. Strength in exports is helping to offset a slowing
in domestic demand for some types of heavy equipment. A producer of
communications equipment reports that orders at the end of 1989
indicate a turnaround from the steadily slowing growth of shipments
occurring in first quarter of 1990. Recovery to trend growth rates
is expected to take most of this year, reaching trend growth by
early 1991. A maker of electrical controls and supplies sold to
other producers of industrial equipment, however, reports steady
growth in sales to its industrial markets and expects demand for its
products to continue to be strong in 1990.
Construction
Several reports indicate that on average construction activity in
the District continues to be stronger than the nation. While demand
for concrete in the Chicago area slumped in December due to
unseasonably cold weather, backlogs were up substantially from year
ago levels, according to one supplier. Gypsum board shipments to
District states have been rising at twice the national pace,
although Michigan continues to lag other District states. A supplier
to the residential construction market reports that contract awards
in the year-to-date through November of last year increased 5
percent in the District states, compared to a 3 percent decline
nationally.
Consensus Outlook
A group of 24 business economists from the Midwest met at the Bank
in mid-December to discuss the economic outlook for 1990. After an
expected flat fourth quarter in 1989, their median forecast shows
real GNP rising 1.7 percent in 1990, on a year-over-year basis.
Their industrial production forecast shows a 1.2 percent decline for
the fourth quarter of 1989 and only 1.1 percent growth in 1990.
However, both forecasted series show marked improvement over the
course of the year, led by consumer spending. In line with the
consensus outlook, the December survey of Chicago purchasing agents
showed expanding activity. Finally, the median forecast for the GNP
implicit price deflator indicated an easing in inflationary
pressures, dropping from 4.2 percent in 1989 to 3.9 percent in 1990.