Beige Book Report: Chicago
September 19, 1990
Summary
Economic conditions in the Midwest were somewhat uneven in August,
but most of the District's economy continued on the slow growth path
reported in recent months. Consumer spending in the District
generally showed modest growth, except in Michigan. Purchasing
manager surveys around the District gave mixed signals, but
anecdotal evidence indicated slow expansion in the manufacturing
sector. Construction and real estate activity slowed, but remained
healthier in the Midwest than in the nation as a whole. While most
large banks have not changed lending standards, some District loan
officers reported a slight tightening, citing a less favorable
economic outlook. District reports indicated no acceleration in the
overall inflation rate since the recent rise in the price of oil.
Crop conditions continued to be favorable.
Consumer Spending
Consumer spending growth in the District has been modest but stable
in recent weeks, although local surveys conducted after the Middle
East crisis showed sharp declines in consumer confidence. A
spokesman for a department store chain reported "below-plan"
national sales growth in recent months, but noted that growth in the
Midwest remained intact during the summer. A representative of a
discount chain stated that sales of back-to-school items were "very
good," but overall sales in the Midwest were weak relative to other
regions, in part due to unseasonably cool weather limiting sales of
fans and air conditioners. An analyst for a general merchandise
chain reported that August sales, after being down in the first week
of the month, increased over the year-earlier period. District sales
were mixed for this chain, however, with strength in some Midwestern
markets partially offset by significant weakness in those areas of
Michigan and Indiana linked to the auto industry. Results of several
independent surveys in August, however, showed sharp declines in
consumer confidence around the District.
Auto sales nationally were little changed in August from recent months, with sources indicating that the Middle East situation has not yet influenced sales. One Midwest dealers' association executive noted that orders for larger cars have not yet been cancelled. A District import car distributor experienced record July sales and reported that August sales were on track to be the best single month in the history of the distributorship. However, a domestic automaker estimated car sales in the remainder of 1990 could drop roughly 500,000 units (saar) below previous estimates, if oil prices stabilize in the neighborhood of $25 per barrel.
Manufacturing
Manufacturing activity in the District generally continued to expand
at a slow pace in recent weeks, although some soft spots exist. An
auto economist reported production in the summer months to be
slightly above normal, due to model changeovers taking place earlier
in the year than normal. Downward revisions in production schedules
over the remainder of the year will be resisted, in the hope of
addressing union concerns about job security. A supplier of truck
engines reported that sales softened in late July and early August,
however, and truck producers recently lowered their 1990 sales
estimates, citing the absence of a previously anticipated increase
in demand for trucks produced prior to the introduction of new fuel
efficiency standards for 1991 models. A steel economist reported
full order books for the third quarter, and stated that fourth
quarter bookings were doing "quite well." A major capital goods
producer reported little change in July shipment growth from the
steady growth experienced in earlier months, and new orders
continued their slow upward trend. A producer of electronic and
computer components, however, reported lower domestic sales growth
than expected, which was attributed primarily to a slowdown in the
development of new technology rather than to a fundamental shift in
demand.
Purchasing manager surveys in the District showed mixed results for August, continuing an uneven pattern. On a seasonally adjusted basis, the Chicago index showed conditions improving slightly in August, led by production, new orders, and prices. The Milwaukee report was mixed, but indicated new strength in the new orders component. The Detroit index in August showed its sharpest drop since November 1987, with both the automotive and non-automotive sector indexes showing contraction. On balance, however, recent District activity has been relatively stronger than that reported in the national survey.
Construction and Real Estate
District construction and real estate activity slowed somewhat in
recent weeks, but continue to fare well relative to the national
trend. A supplier of gypsum board reported that Midwest residential
and non-residential contract awards (in floor area) posted solid
gains year-to-date (through July) in 1990, while awards declined
nationally. A cement producer reported that industry shipments in
the Great Lakes region grew on a year-over-year basis in the first
half of the year, and that the firm's Chicago-area backlog in early
August increased significantly from both a month earlier and a year
earlier. However, a District service firm involved in the early
construction process reported recent new building activity in
several major metropolitan areas of the District has "slowed to a
trickle."
Area housing sales grew in July, compared to a national decline. The Midwestern market remains one of the "healthiest in the nation," according to a District realtor. However, this contact reported softening overall housing sales in recent weeks, citing a recent rise in mortgage rates, increased uncertainty generated by the Middle Eastern crisis, and a slowdown in company transfers. The Detroit market was reported to be running below last year's pace in the first half of the year, and slowed further recently.
Financial Markets
While lending standards at several large District commercial banks
have changed little in recent weeks, their loan officers cited some
tightening in selected sectors. Several loan officers told of
tighter standards for middle market commercial and industrial
customers, while one reported stricter standards for both large and
small firms. Stricter standards were generally attributed to a less
favorable economic outlook, but one contact cited stress on the
bank's capital position. Tightening occurred most often in the form
of stricter covenants and collateral requirements. To the extent
that tightening has occurred, standards for construction, land
development, and other commercial real estate loans have been
tightened somewhat more than for commercial and industrial loans.
Prices
Despite the recent rise in the price of oil, several District
contacts reported downward pressures on the prices of a variety of
goods. An analyst with a major retail chain reported that pre-
Christmas type discounting by competitors is already beginning to
occur.
Although housing prices are holding up relatively well in the Midwest, the rate of increase has slowed substantially in recent months. On the manufacturing side, the price component of the Chicago purchasing manager survey indicated more respondents paying increased prices in August than in July, although the trend was basically unchanged from that in June and July. One District manufacturer of heavy moving equipment reported prices declining in the face of weaker demand. Crop prices have fallen in recent weeks.
Agriculture
Midwest crop conditions appear favorable. A high proportion of the
corn and soybean acreage is rated good-to-excellent in District
states. Recent warm temperatures are believed to have added somewhat
to the harvest potential and eased concerns about an early frost on
this year's late maturing crops. Crop prices, especially for corn,
have retreated considerably in recent weeks as export prospects have
deteriorated and the forthcoming harvest promises adequate (but
still relatively tight) supplies for the year ahead. The declining
corn export prospects reflect a large world wheat harvest this year
and the likelihood that wheat will displace some corn in livestock
feeding rations.