Beige Book Report: Chicago
September 18, 1991
Summary
The Seventh District economy expanded modestly in July and August,
according to most contacts, despite sluggish consumer spending
growth. The overall manufacturing sector strengthened further, with
continued gains in consumer durable goods production joined by hints
of recovery in several capital goods industries. Residential real
estate transaction activity softened somewhat, but remained
sufficiently brisk to support gains in household goods production.
The outlook for commercial construction and supplier industries was
little changed. Bank asset and retail deposit growth in the District
was restrained by both supply and demand factors.
Consumer Spending
Contacts generally indicated that growth in District consumer
spending remained sluggish. One large general merchandise chain
reported relatively flat sales in August (in nominal dollars, year-
over-year) in the District, in line with the national average, and
stated that regional differences in sales results have narrowed
markedly over the year. A large discount chain reported that its
sales in larger markets in the District declined in August (compared
to last year), in part due to competitive pressures, while sales
rose nationally. A retailers' association in Michigan reported that
members continued to experience depressed traffic and sales levels,
but conditions have stabilized in recent months. A liquidation
trustee reported that retail contacts have experienced some upturn
in sales in the past month. A large automaker reported that car
sales declined in recent weeks, but still remained stronger than
earlier in the year. However, anticipated strengthening in sales to
fleets over the next two months is expected to boost total sales.
Manufacturing
The recovery in the District's manufacturing sector continued in
recent weeks. Gains in consumer durable goods production were joined
by signs that some capital goods production began to turn upward,
although weak spots still exist. Purchasing managers' surveys in
Detroit, Indianapolis. Western Michigan and Chicago showed
increasingly widespread expansion. Detroit reported some softening
in responses from nonautomotive businesses, but widespread gains
were again recorded in the automotive sector. The results from
Indianapolis registered a significant turnaround in the second
quarter, with an important contribution from the automotive sector.
Western Michigan showed continued solid expansion in July and
August, with new signs of improvement from several capital goods
respondents. Chicago's index moved strongly into expansionary
territory in August, after gradually rising from low levels early in
the year. Each of the monthly surveys recorded consistent inventory
liquidation thus far in 1991, both during the contractions recorded
early in the year and during the recoveries seen in more recent
months. Most anecdotal reports also suggested strengthening among
consumer durable goods producers and their suppliers. A large steel
producer reported that shipments in the summer months were better
than expected, with important contributions from shipments to auto
and appliance manufacturers, although most customers still show
little inventory rebuilding. A large electronics firm reported that
semiconductor order growth continued to trend upward, with orders
from automakers making an important contribution. Semiconductor
orders from the previously weak capital goods sector were expected
to turn up m the fourth quarter. An electric utility in Michigan
reported its first monthly year-over-year gain in power sales to
industrial customers in August. Several small suppliers to the auto
industry reported new hiring activity, although a large automaker
plans to use overtime rather than new hiring to meet labor
requirements for the balance of the year. A producer of paper
containers reported that demand from appliance producers has been
stronger than expected, and a large appliance manufacturer stated
that the industry trough had passed. Reports from the capital goods
sector were mixed. but generally better than earlier in the year. A
July survey of metalworking firms reflected improved expectations
for business conditions, although appraisals of current conditions
remained weak. After recording flat sales in the first half of 1991,
a heavy machinery producer reported solid order gains in recent
months. A large manufacturer of heavy-duty trucks reported renewed
softness in industry orders. A producer of a wide range of
specialized machinery reported that order gains remained relatively
soft, however with improved orders for food processing equipment
offsetting continued weakness elsewhere. A large manufacturer of
construction equipment experienced a renewed slump in orders in
August and stated that dealers continued to cut inventory amid low
sales expectations.
Real Estate/Construction
Several contacts reported that the sharp pickup in the District's
residential real estate sector earlier in the year may have softened
somewhat recently, but activity is still running at respectable
levels. A large District realtor reported that residential sales
gains have been running in line with seasonal expectations in recent
months. After home sales rose sharply in the second quarter, housing
permits in Indianapolis rose fairly sharply in July. A realtors
association reported that home sales in Wisconsin remained brisk in
the summer, and 1991 sales are running at a record pace. A producer
of gypsum wallboard reported that industry shipments into the
Midwest strengthened in July. An appliance distributor reported that
orders from homebuilders in the Midwest had Improved over the past
several months, with continued gains expected in the second half of
the year. Year-to-date industry appliance shipments to dealers in
the Midwest were essentially flat, according to one large
manufacturer, which is relatively strong performance compared to
much of the rest of the country.
Commercial real estate activity generally remained subdued in August, although the pickup in District manufacturing activity may be beginning to boost the demand for industrial space. A brokerage firm reported that rental rates for downtown Chicago office space continued to decline in the second quarter, with rising vacancy rates joined by negative net absorption. A large District cement producer tied to commercial construction reported continued year- over-year shipments declines, with little near-term improvement expected for shipments in the Chicago metropolitan area. A group of small commercial lighting companies anticipate a 3 to 5 year depression in sales for nonresidential building in the Chicago market. The office market in metropolitan Detroit remained soft in recent months, according to a brokerage firm, with vacancy rates continuing to rise.
Few District banks reported new tightening in standards for new commercial real estate loans in recent months, but financing generally remained difficult to obtain, with strict preleasing and borrower equity requirements in place. Lending terms have become increasingly costly, particularly for loan extensions. One District retail store chain recently completed a large equity offering designed to allow the retailer to internally finance its store expansion program. Previously, expansion had been constrained by the inability of real estate developers to obtain construction financing from banks.
Banking
Reports from several large banks in the District reinforced earlier
indications that both demand and supply factors worked to suppress
bank credit and retail deposit growth in June and July. Several
large banks reported that demand for retail deposits was dampened by
increasingly competitive returns on nondeposit instruments and
sluggish economic conditions in deposit market areas. At the same
time, banks themselves reported somewhat less aggressiveness in
promoting retail deposits. Generally, slower asset growth led to
some softening in the desired growth for wholesale liabilities, but
neither increased deposit insurance premiums nor slower asset growth
affected the desired growth for retail deposits. Still, several
respondents indicated that they were likely to be less aggressive in
attracting retail deposits over the balance of the year.
Most banks contacted reported weak asset growth since the end of May. Each bank that reported weak asset growth cited softer loan demand, although other factors (including planned reduction in lending and securitization) were also cited. At the same time, most banks reported little change in standards for commercial and industrial leading in recent months, after more frequent indications of tighter standards being adopted earlier in the year. Weaker loan demand was generally concentrated among larger corporate customers, with banks noting several reasons, including lower financing requirements for inventory and capital investment, as well as alternative nonbank and/or capital market financing sources. Some reports of increased loan demand from medium-sized and smaller firms arose, with one bank reporting increased capital spending by smaller businesses.