Beige Book Report: Chicago
January 21, 1993
Summary
The Seventh District economy strengthened further in December and
early January, led by consumer spending on durable goods. District
retailers generally reported that holiday season sales gains
exceeded expectations, and several retailers noted that sales gains
held up well in the early post-holiday period. After losing some
momentum in the third quarter, District manufacturing activity
strengthened in November and December, particularly as motor vehicle
production rose. Indicators of District employment remained mixed.
The consensus forecast of a group of economists from Midwest firms
called for modest but steady GDP growth in 1993, with key
contributions from motor vehicles and business fixed investment, two
areas important for Seventh District manufacturing activity.
Consumer Spending
District retailers generally reported better-than-expected holiday
sales results, and several reports suggested that sales gains held
up well in late December and early January. Responding to somewhat
better-than-expected sales, a large department store chain raised
its plan for first-quarter same-store sales gains to a level in line
with its experience in the holiday season, and above the pace
planned for the first quarter at this time last year. Another large
department store chain reported that same-store sales gains in the
Midwest ran roughly 5 percentage points above the national average
during the holiday mason. A toy retailer's sales gains in the
Chicago area were significantly above its national average. An
association of small retailers in Illinois reported that members'
sales gains ran in the high single digits, on average, during the
holiday season. An association of small retailers in Michigan stated
that "our people are generally euphoric." One retailer's mail order
business performed well above plan during the holiday season. This
contact stated that "hopefully, we've turned the corner, but we
don't want to get fooled again."
Several retailers noted that January will be a critical month for this year's plans, and sales gains appear to have held up well in the early post-holiday period. A report from a large department store chain indicated that sales growth strengthened in the last two weeks of December. A large retail chain reported that year-over-year sales gains in early January were in line with those posted in December, despite a more difficult comparison, and results in the Midwest were running slightly ahead of the national average. Early January sales gains were led by durable goods, notably appliances, furniture, and personal computers. Another large retail chain stated that durable goods sales gains held up in early January, after a resurgence in the fourth quarter of 1992. This firm recently accelerated receipt dates for spring merchandise, which should lead to more aggressive ordering. A large discount chain reported disappointing results for early January, but was optimistic about overall consumer spending growth holding up in the first quarter.
Manufacturing
Purchasing managers' surveys and reports from individual
manufacturers suggest that District manufacturing activity turned
higher on a seasonally adjusted basis in November and December. In
December, the overall index for the Chicago survey reached its
highest level since the official onset of the national recession.
The recent rebound in the overall index was concentrated in the
production and new orders components, although the employment
component also contributed. After slipping slightly in recent
months, the price component rose in December, but remained at a
level well below those experienced in the late 1980s. The director
of the Detroit purchasing managers' survey characterized December's
results as "no doubt the most encouraging news we've had in several
years ... the economy is maintaining the recovery momentum it
developed late last year." The survey's overall index remained
essentially flat in December, but only after a spike in November
that lifted it to a three-year high. In the fourth quarter of 1992,
the strengthening in the overall Detroit Index was led by responses
from participants in the auto industry. A large auto producer
reported that showroom traffic posted a strong increase on a
seasonally adjusted basis in recent months. Citing improvement in
orders from the auto industry, a steel industry analyst expected
steel production to rise in the first quarter to a level 18 percent
above a relatively weak year-earlier period. A machine tool producer
reported some slowing in orders in recent months, but this was
attributed to temporary uncertainty about prospective tax
legislation. An office furniture producer stated that sales ran flat
with weak year-earlier levels during recent months, but the company
also reported new orders' gains and expected improved sales in the
new year. An electronics manufacturer stated that orders for
semiconductors from overseas markets have been holding up well in
spite of slowing growth in those economies.
Employment
Alternative data sources continued to depict varying degrees of
recovery in District labor markets, but the overall picture is
generally one of improvement. Household survey estimates for
Illinois and Michigan and local area unemployment statistics data
for the other District states show a continuing recovery in total
District employment in recent months. Since late 1991, when total
employment (as measured by the household survey data) bottomed out,
the recovery in these measures has been closely in line with the
pace of the recovery from the 1981-82 recession, and total District
employment now exceeds the levels that prevailed at the onset of the
recession. Establishment survey estimates for Illinois and Michigan
hint at a modest upturn in recent months, but the estimates for
these states have been essentially flat since their recessionary
lows in 1991. In Indiana, Iowa, and Wisconsin, where direct
household survey estimates are unavailable, establishment survey
estimates have reached and exceeded current measures of pre-
recession levels. The underlying trend in the employment components
of the Chicago and Milwaukee purchasing managers' surveys have
followed paths similar to past recoveries. Employers continued to
express concern about the impact of rising health care costs as a
factor in restraining hiring and contributing to layoffs.
Economic Outlook
A reserved but optimistic mood prevailed at a recent outlook
conference held at the Federal Reserve Bank of Chicago. Concerns
persisted in some areas, but belief in the sustainability of the
recovery seemed increasingly firmly rooted. The median forecast of
24 economists called for year-over-year real GDP growth of 28
percent in 1993. Key contributions were anticipated for business
fixed investment and consumer spending on motor vehicles, two
important sectors for District production. Car and light truck sales
were forecast to rise about 10 percent to 14.0 million units in the
new year, while the median forecast for housing starts called for a
12 percent increase to 1.353 million units in 1993.