Beige Book Report: Chicago
March 14, 1990
Overview
Economic activity in the Seventh District is slow but improving,
according to District respondents, with much of the softness coming
from the auto industry. Retailers report that sales volume is
strong, enough to suggest that the economy is not currently in a
recessionary environment. However, production in the auto industry
continues to be weak, with auto dealers reluctant to increase
orders. Steel orders have risen, however, as the auto industry gears
up to reopen plants that were temporarily closed to reduce auto
stocks. Capital-goods producers report that orders are beginning to
improve. District construction and real estate activity continues to
outpace the nation. Movements in agricultural prices are mixed, but
improvements in farm land values have slowed.
Consumer Spending
Retail sales have continued to improve since the beginning of the
year, although District sales were lagging the nation in early
February. A major mass merchandiser in the District reports that
January sales of durable goods, in current dollars, were 3 percent
above a year ago. Traffic counts in stores were above year-ago
counts for the first time in eight months. Total company sales in
the District were up substantially in the first week of February,
but lagged sales nationwide. An economist in the retail industry
expects that the dip in housing starts is now over and improvements
over the next few months will begin to strengthen sales of housing-
related goods. Several retailers report that inventories are high,
in part because imported goods were ordered early in 1989 in order
to be available for the Christmas season. As a result, buying from
manufacturers is constrained and price discounting continues to be
widespread. However, one retailer stated that the resolution of the
Campeau Corporations financial situation eased some of the price
competitiveness among retailers.
On the production side, shipments of appliances have been below year-ago levels, but producers' inventories are in good shape. A producer of a wide range of household appliances reports that shipments were down 3 percent in the first six weeks of 1990, compared to a year ago. An industry analyst expects shipments to rise in the second quarter of 1990 and to continue rising gradually throughout the year.
Motor Vehicles
Auto production continues to be the major drag on the District
economy. Car sales dropped in February from the brisk pace in
January, according to an industry analyst, but stocks (measured in
days supply) were at near normal levels for February. Some producers
are reluctant to reopen plants until dealer orders improve. One
industry economist reported that dealers are overly cautions in
ordering, fearing a repeat of the overstocking that occurred in the
fourth quarters of 1989. Sales during the second quarter of 1990 may
be constrained because dealers will not be adequately stocked for
the spring season. A shortage of minivans next quarter is also a
possibility, but production can be expanded quickly if necessary,
according to one producer. Plant closings were extended in February
on some mid-sized cars, but most plants in the District are expected
to be running in March.
Steel
Steel production was weak in December, but demand since January has
been improving across a broad base. Inventories were being pulled
down at the end of last year, because steel prices were falling and
producers holding steel inventories wanted to avoid paper losses.
However, shipments to durable-goods manufacturers have begun to edge
up in recent months after reaching a bottom in November, according
to a steel analyst. Coated sheet steel is reportedly in short
supply. Orders are "flooding in" from auto producers and orders from
appliance producers are also rising. Also, orders for steel used for
oil and gas drilling and for pipelines were reported to be
improving. Service centers report that business is good, with order
volume up so far this year.
Capital Goods
Capital-goods producers in the District generally report some
improvement in orders through February. Orders for heavy trucks have
troughed and are now moving up, according to a supplier of
components to the industry. Orders of metal-cutting tools, however,
are down 10-15 percent from a year ago. Also, light industrial
equipment sales for homebuilding and construction, which declined 5
percent in 1989, were still on a downward trend in January,
according to an industry analyst. Farm machinery sales are doing
exceptionally well, with tractor sales up 15 percent last year and
still improving. A producer of a wide range of industrial products
reports a good volume of orders for all product lines, with no
apparent fall in market demand for their industrial products since
the beginning of the year. Most of their plants are operating at
new-capacity levels.
Construction and Real Estate
Construction activity started the year briskly, according to
Chicago-area suppliers to the industry. Strength is across-the-
board, with industrial construction doing well and commercial
construction described as very strong. A large Chicago-area building
materials supplier reports that shipments are up 7 percent since the
beginning of the year and backlogs have been rising. A producer of
gypsum board reports plants are running close to capacity with
shipments to both residential and nonresidential construction
contractors outpacing the national average.
Housing activity in the Chicago area shows signs of reviving from last year's slump. Warm weather has been a contributing factor, but favorable mortgage rates are also cited as important. Mortgage applications are 10 percent higher than a year ago, according to a Chicago bank. Sales of existing homes in the first two months of 1990 are far ahead of last year's pace, according to a local realtor. Moreover, housing permits for new construction surged in January, suggesting continued improvement in housing activity over the next few months.
Agriculture
Recent strength in cattle and hog prices has buoyed returns to
District livestock farmers. Milk prices, after surging to record
highs in late 1989, are now declining seasonally. The decline may
pull milk prices down to year-ago levels by spring if milk
production turns up as expected. Corn and soybean prices remain well
below year-earlier levels despite relatively tight grain supplies
both domestically and worldwide. Recent precipitation patterns have
eased, but not overcome, the low soil-moisture conditions and the
western corn belt.
Our latest survey of agricultural bankers indicates that the uptrend in District farmland values slowed in the final quarter of 1989. On average, District farmland values rose less than 1 percent in the fourth quarter and about 6 percent during all of last year. Lower crop prices and concerns that the 1990 Farm Bill will scale down government farm program benefits have contributed apparently to the slower rise in land values.