Beige Book Report: Chicago
May 1, 1991
Summary
Contacts indicate the rate of contraction in the Seventh District
economy slowed in March and early April. Reports from District
retailers suggest that consumer spending remained sluggish, although
customer traffic gains continued. Residential real estate activity
improved significantly. District auto dealers reported higher
traffic levels, but new auto sales remained soft. At the same time,
new orders received by District suppliers to the auto industry
improved, brightening the outlook for production gains in the second
quarter. Other District manufacturers report continued slow but
stabilizing levels of activity, in line with results posted by
purchasing managers' surveys. The financial condition of the
District's banking sector is generally in better shape than the
nation on average, and one large bank indicated a shift in April
towards a more aggressive lending posture.
Retail Sales
Several District retailers indicated that real consumer spending may
have declined slightly in March and early April, as improved
consumer confidence has yet to translate into solid sales gains for
retailers. District consumer spending no longer shows as much
strength, relative to the national average, as it did through 1990.
A large general merchandise retailer reported continued improvement
in traffic and customer attitudes. However, sales continued to run
below year-earlier levels. Consumer buying is increasingly
sophisticated, according to this contact, leading to a more
competitive pricing environment. A large discount chain, previously
reporting consistent sales gains, revealed that sales in March fell
below year-earlier levels. A contact with this firm stated that
gardening equipment sales in early April were showing solid growth,
however, and these sales have tended to be a good leading indicator
of overall Spring spending.
Residential Real Estate
While household durable goods spending remained weak, residential
real estate activity improved appreciably in March. Higher levels of
inquiries reported by District realtors in the past few months have
been followed by significant sales gains. Improved affordability,
lower interest rates, and new governmental assistance programs for
first-time home buyers contributed to the turnaround. A large
realtor in the Chicago area reported that March residential sales
were the highest for that month in the past ten years.
Autos
New motor vehicle sales remained slow in March and early April.
District dealers continued to speak of improved traffic and customer
attitudes, while new car sales gains continue to be limited. Several
contacts indicated that new car sales were being constrained by
tight financing from both bank and non-bank lenders. Down payment
requirements have risen sharply in recent months, in many cases
posting a three-fold increase from last year. Efforts to shorten
loan maturities also have impacted sales. Some lenders are putting
increasing pressure on dealers to share in losses generated by
higher defaults on previous loans, according to an industry source,
causing some dealers to pass along fewer new loan applications.
Several lenders also reported cutting back on the number of dealers
from whom they accept loan applications.
Several dealers expected improved traffic to translate into sales gains soon, and contribute to some improvement in their orders to automakers. Auto production is being spread around to more lines opening at slower rates, according to one industry source, which could indicate that overall capacity is being prepared for stepped- up production. Assembly schedules for the second quarter were left unrevised in early April, marking the first time since last July that planners did not cut schedules from levels announced a month earlier. One auto Industry analyst contended that the announced 5.5 million unit annual rate for second quarter production (still a low rate, but above that for the first quarter) could well be exceeded. A firm providing metal painting services for new auto parts reported that orders "ounced back" in early April. The firm's production is now running only 5 percent below year-ago sales, after experiencing production runs 40 percent below last year as late as mid-March. Steel producers also reported new improvement in orders from automakers in recent weeks.
Manufacturing
Reports by non-auto manufacturers generally indicate continued
weakness in shipments and production. A large manufacturer of
electrical equipment reported that sales declined significantly in
the first quarter from a strong year-earlier period. After plunging
in February, District steel production improved in the month of
March, then flattened out in early April, at a level nearly 20
percent below year-earlier levels. District steel manufacturer
reported that industry shipments generally remained firm relative to
production, as steel producers worked to reduce inventory built in
advance of a threatened yet unrealized steelworker strike. A large
capital goods manufacturer reported that machinery orders were
"still on the weak side," but the overall impact of the recession
remained mild. However, this contact stated that overseas revenues
declined significantly in the first quarter. as slower growth in
Western Europe and increased political uncertainty in the Soviet
Union began to impact sales. A large manufacturer of a wide variety
of specialty materials and office supplies, citing weaker foreign
economies and the strength of the dollar, expects to export fewer
goods in 1991.
Employment data and purchasing managers surveys support producers' reports suggesting that the District manufacturing sector remains weak, but that the rate of decline has slowed since February. District manufacturing employment continued to decline in February (the latest month available), but recent job losses have been in line with the results posted in the nation as a whole. Excluding Michigan, District manufacturing employment has been relatively stable in recent months. District purchasing managers' surveys indicate slowing rates of contraction. The index produced by the Chicago survey bottomed out in January. While the index continued to indicate contraction in March, some of the best improvement from January to March was evident in the new orders component. The Detroit index also improved from January to March, yet remained at a low level relative to the Chicago results. Most of the improvement in Detroit in March came from the automotive sector, described in the survey report as "desperately weak" earlier in the year.
Credit Developments
Reports from District bankers indicate that new lending activity is
still weak, but at least one banker anticipates improvement in the
near future. District banks are generally healthier than the
national average, with lower exposure to loans on real estate and
merger lending than those incurred by some banks in other regions.
Several large District banks reported no further tightening in
credit standards since January for merger business, commercial real
estate, or consumer lending. One major bank recently completed a
bond issue for the purpose of expanding lending activity over the
next few months.
Several reports by nonfinancial corporations indicated increasing difficulty in collecting receivables and financing inventory, but several small manufacturers reported continued access to bank credit A large diversified manufacturer reported that a growing number of customers are slowing their payments. in response to slower payments customers themselves are experiencing. A District auto-parts manufacturer reported that most customers continue to pay reliably, including one distributor who recently reorganized in a leveraged buy-out. However, payments from several leveraged auto-parts retailers recently slowed, according to this source. Outside of commercial real estate, difficulty obtaining credit appears to be concentrated in retailing. A large national discount chain reported that a growing number of suppliers are having difficulty obtaining short-term credit, especially for inventory. However, several small manufacturers in Wisconsin, Illinois and Indiana reported continued access to bank funding, despite weak sales so far this year. One small machining shop recently was able to obtain a bank loan for the purchase of a tool costing one-third of its expected sales this year, in advance or a yet-to-be released customer order.