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Beige Book Report: Chicago

June 20, 1990

Summary
Contacts in the Seventh District report weakening in construction activity and retail sales, while manufacturing activity remains mixed but generally improving from weakness early in the year. Residential and nonresidential construction has slowed in recent months, although the District is still outperforming the nation on average. General merchandise sales are weakening in market segments linked to housing activity, particularly furniture and appliances. However, trends in most other products are unchanged, with apparel sales soft and entertainment-based electronics sales providing most of the growth. In manufacturing, auto-related industries have improved from the first quarter's weak performance, but several capital-goods producers report that expanding segments are being offset by slowing segments of their markets. Weather conditions from late May to early June slowed plantings and damaged crops in the District.

Construction and Real Estate
Nonresidential construction in the District as a whole continues to outperform the nation, but construction activity in some District states has declined in recent months. A producer of building materials reports that nonresidential construction awards (in floor area) in the first four months of 1990 were up 7 percent from a year ago for the District states, compared to a 10 percent decline nationally. However, Michigan and Wisconsin both registered declines in April. Illinois declined in March, but was positive in April. A large Chicago-area building materials supplier noted that shipments in April were below year-ago levels, although year-to-date shipments were up. Some projects in the planning stage are reportedly being pushed back, but so far few have been cancelled. Chicago's office vacancy rate is below the nation's, according to one contact, but vacancy rates in its suburbs are now slightly above the national average. Commercial sales of existing office space are unchanged from a year ago, but a commercial realtor notes that institutions providing financing are paying increasing attention to "quality."

Residential construction in the District is following a pattern similar to the nonresidential sector. Contracts for housing construction were up 10 percent an the District, compared to an 8 percent decline nationally for the first four months of 1990. However, the District dropped 3 percent in April from year-ago levels, with Illinois accounting for the bulk of the decline. A Chicago-area realtor reports that local residential sales were up in April, May, and early June over a year ago, after being flat for several months. Housing prices are edging up, but have slowed sharply from the year-ago pace as houses take longer to sell. Some large banks in early June have dropped their mortgage rates on average about a half a point to slightly below 10 percent.

Consumer Spending
General merchandise sales in the District have been weakening since April, according to several retail analysts, reflecting in part the housing slowdown and special factors. An analyst for a major retailing chain reports that sales of major appliances fell sharply in April and May, led by household improvement goods and household furnishings. Overall, sales growth in the District has been about equal to overall sales growth for the chain, after outperforming the nation earlier in the year. An analyst for a nationwide discount chain reports that the Midwest was their only market region to experience declining sales in May. Store sales were hurt in part by the expansion of new discount chains into the region and by liquidation sales at stores in bankruptcy. An appliance producer reports that shipments, down 6 percent in the year-to-date through May, are weaker than expected.

Sales of apparel goods continued to be weak in early June. Apparel sales, according to one analyst, have been hurt by unseasonably cold weather and consumer resistance to higher prices. Higher prices were attributed in part to a slackening of competitive pressures after several retail chains filed for bankruptcy. Most of the sales decline in apparel is concentrated in women's apparel, with men's and children's apparel showing modest strength.

Manufacturing
Manufacturing activity in the District continues to be mixed, with strength in auto-related industries more than offsetting weakness in construction-related industries. An auto analyst reports that the expected rebound from last quarter's weak auto production includes some seasonal inventory building, as auto makers prepare for the changeover to 1991 model production. Inventory levels are viewed as being in good shape, running 20 percent below a year ago despite sales being down 10 percent. Steel production this quarter is expected to nearly equal last year's second quarter high, according to a steel analyst, who has revised estimated output for 1990 upward by 5 million tons to 82 million tons (compared to 84 million tons in 1989).

Capital-goods producers generally report mixed activity, following the overall pattern of manufacturing. A producer of heavy equipment states that District plants that make highway construction and mining equipment are doing very well, but plants that produce heavy equipment tied to building construction are slowing down. A producer of agricultural equipment reports continued sales strength especially for combines and four-wheel drive tractors. However, agricultural equipment sales are expected to begin slowing by the end of the year, as replacement demand softens. Sales of light industrial equipment, which follows the housing industry closely, are down 10 percent from a year ago. A producer of food processing and material handling equipment notes some softening in orders from very high levels. A materials supplier cites strength in the demand for pumps and compressors, coming in part from new chemical plants, and for plastics-making equipment, coming in part from overseas. An economist for a large electronics producer reports that orders for communications equipment have returned to double-digit growth rates and shipments are expected to reach double-digit rates by the end of the year. Orders for electronic components used in computers are still relatively weak, but are beginning to show some improvement.

Agriculture
Cool temperatures and frequent rainstorms from mid-May through early June slowed crop plantings, caused ponding and plant-emergence problems in some planted fields, disrupted haying operations in many areas, and resulted in pollination and frost damage problems for some fruit powers in Michigan and Wisconsin. Some 13 percent of the corn acreage and 47 percent of the soybean acreage in District states had not yet been planted as of June 2, a date when plantings are normally winding down. The planting delays were most apparent in Southern Illinois and Indiana. Faced with a June 8 to 15 planting deadline, some of this year's intended corn acreage will likely be shifted to soybeans.