‹ Back to Archive Search

Beige Book Report: Chicago

June 19, 1991

Summary
Most sectors of the District economy were flat to slightly expanding in May and early June, while traditionally lagging industries continued to decline. A solid recovery in residential real estate activity continued, although commercial construction remained soft. Retailers in the District reported that consumer spending advanced in recent weeks, with sales gains led by housing-related spending. Reports from District manufacturers were mixed, with producers of consumer durable goods generally reporting better results than those posted by producers of heavy equipment. Capital spending intentions of District businesses indicated continued cutbacks and postponements in the second quarter of 1991.

Real Estate/Construction
A recovery in District residential real estate activity continued in recent weeks, helping to bolster construction spending, consumer spending on household durable goods, and manufacturing activity related to housing. A large District realtor reported continued solid year-over-year sales gains in May and early June. District housing construction fell off slightly in April, but only after an unsustainable surge in March. Industry contacts indicated little change in the weak outlook for commercial construction, however. A large producer of cement reported that shipments continue to decline in the month of May (from the year-earlier period), but not quite so severely as in previous months. Cement shipments for commercial construction were decidedly weaker than those for residential building, and the company's backlog continued to shrink. At the end of May, this company's backlog was 65 percent below May 1990. A recent study found that the amount of new office space under construction in the suburban Chicago area declined by over 50 percent from the fourth quarter of 1990 to the first quarter of 1991, reaching the lowest level in ten years. Labor strikes in Chicago and Detroit have been holding back several large construction projects. A settlement is expected soon in the Chicago negotiations, while bargaining is in the early stages in the more recent strikes in Detroit.

Consumer Spending
The strengthening in the housing sector has begun to translate into gains in other forms of consumer spending, according to several District retailers. A large general merchandise retailer reported that May and early June sales in the District increased in real terms and outperformed the company's national average. This contact had previously reported relative weakness in sales in the District in the first quarter of 1991. Appliances and home improvement products provided the largest contributions to sales growth. A large discount chain reported continued modest sales gains in May, with District sales growth in line with national results despite an increasingly competitive District environment facing the retailer. This contact stated that sales growth has not yet been robust enough to translate into improvement of their orders to manufacturers, however, as efforts to trim inventory continue. Despite the surge in housing, several smaller specialty furniture retailers in the District continued to experience a very difficult period, with many store closings reported in the first half of the year. One small District furniture retailer reported that May and early June sales continued to post year-over-year declines, and noted that credit card sales were especially weak.

New car sales' trends remain difficult to interpret, according to several industry analysts. The 1990 switch from a two-turn to a three-turn strategy by automakers selling to captive rental fleets generated distortions to seasonal sales patterns. April sales figures (which under a two-turn strategy would include some sales to fleets) were understated by using traditional seasonal factors. Th higher level of fleet sales in 1990 provided a second factor helping to understate recent sales strength, as higher resale levels of nearly-new program cars substituted for new vehicles in early 1991. A major domestic car manufacturer estimates that after accounting for these effects, total light vehicle sales (including domestic and imported vehicles) have been essentially flat in recent months. Reports from several District auto dealers generally support this conclusion. One large District domestic car dealer reported that sales fell 20 percent in May from a year earlier, in line with declines posted in March and April. Citing higher auction prices, this dealer ceased selling program cars, which is consistent with widespread expectations that sales of these "nearly-new" vehicles will lessen in importance in the months ahead. Sales to first-time car buyers declined significantly, in part because basic demand was off and in part because first-time buyers fall into stricter credit- quality categories.

Manufacturing
District manufacturers of consumer durable goods generally reported better results than producers of heavy equipment. A large District appliance manufacturer reported modest improvement in shipments, especially for products going into new homes. Shipments of air conditioners and microwave ovens remained weak, however, and excess inventories have to be worked off before shipments at the plant level improve. A large manufacturer of lawn care equipment reported that its factory sales strengthened from March to April, but remained well below year-earlier levels. Production in the auto industry (on a seasonally adjusted basis) generally continued to register the gains recorded early in the second quarter, although some early shutdowns for new model changeovers have held back overall production. Still, May output exceeded announced schedules for the first time in almost a year. A steel producer reported that orders from automakers indicate continued growth (on a seasonally- adjusted basis) in auto production through the third quarter, This contact stated that summer shutdowns may be shorter than anticipated, as automakers speed up production of new models. An electronics firm reported that orders rose for the second consecutive month in May, after experiencing moderate weakening earlier in the year. Orders received from the auto industry were particularly strong, consistent with other evidence of improved production levels in this key District industry. The automotive component of the Detroit purchasing managers' survey index advanced sharply in May, registering its first expansionary month in 1991.

Several capital goods producers, whose sales recoveries tend to lag a turnaround in the overall economy, reported continued weakness in sales and production. A large District manufacturer of heavy equipment reported that sales continued to decline at a significant pace in May but the rate of decline has improved somewhat over the past three months. Orders in-hand remain very weak, however, off as much as 60 percent from a year earlier. Dealer inventories remain high and are expected to dampen the production response to an anticipated sales increase in the second half of the year. Another capital goods producer reported that sales of construction equipment continue to show sharp year-over-year declines, and sales of agricultural equipment in May turned soft again, after some improvement in previous months. A large diversified manufacturer reported that orders have been mixed recently, with weakness concentrated on the capital goods side of the business. A trick manufacturer reported modest improvement in orders for heavy-duty trucks, but medium-duty truck orders remained at recessionary levels. This contact noted that medium-duty truck orders usually improve before heavy-duty trucks as an economic recovery asserts itself, and attributed some of the weakness in medium-duty trucks to financial problems facing small businesses. A manufacturer of motor vehicle engines also reported that orders for heavy-duty truck engines strengthened in recent months, but production planning remained cautious.

Capital Spending
A small sampling of District manufacturers indicates that cutbacks and postponements of capital spending plans may have extended into the second quarter of the year. A large manufacturer of heavy equipment reported 1991 capital spending plans had recently been cut to a level 16 percent below last year, after plans at the beginning of the year called for flat spending. A manufacturer of truck engines reported that 1991 spending plans were cut in the first quarter to a level 30 percent below last year, but have remained in place since then. A large District manufacturer of paper-based containers reported that 1991 capital spending plans were cut at the end of March to a level 50 percent below 1990, citing industry overcapacity and a reluctance to borrow. A steel producer reported that 1991 spending plans, previously scheduled to be 20 percent lower than 1990, had been newly cut to a level 40 percent below last year. The capital expenditures component of the Milwaukee purchasing managers' survey fell from 55 percent in April to 48 percent in May, reaching its lowest level since late 1987. Industry orders for machine tools have weakened in recent months after holding up well through the early stages of the recession. An industry participant stated that sales have become less cyclical, as customers show increased sensitivity to efficiency considerations, relative to capacity requirements. This company still expected substantial internal capital expenditure growth this year. A machine tool industry representative reported that companies specializing in sales to the auto industry have suffered disproportionately in the current downturn.