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Beige Book Report: Chicago

September 8, 1993

Summary
Seventh District economic expansion proceeded slowly in July and early August, while efforts to clean up after the flooding got underway. Reports from a variety of retailing contacts indicated modest improvement in consumer spending. Housing markets remained relatively active, although bad weather restricted construction and the delivery of building materials. Manufacturing activity flattened out during a seasonally slow period, but is generally expected to build momentum over the rest of the year. Reports from banks indicated that commercial, industrial, and consumer lending progressed at a somewhat stronger pace. Flood damage and related slow crop development reduced anticipated agricultural production and left a sizable portion of the remaining corn and soybean crop vulnerable to an early frost.

Retail Sales
Discussions with retailers, state tourism officials, auto dealers and other contacts were largely consistent with a modest pickup in consumer spending in July and August. A large discount store chain reported that same-store sales gains improved in August, with hard lines leading sales, and results an the District slightly stronger than the national average. While a major department store chain reported solid gains in back-to-school sales during August, some other retailers stated that back-to-school sales have proceeded somewhat more slowly than anticipated. One retailer speculated that a burst of later-than-usual vacations alter an extended period of bad weather may have been partly responsible. According to another retailer, there has also been a trend toward later back-to-school sales, and this contact stated that continuing sales gains in home furnishings and nonseasonal merchandise were more indicative of the true underlying momentum in retailing activity. Bad weather limited tourism spending in Wisconsin in July, but a store official stated that with improvement in weather during August, a substantial increase in business has occurred in many parts of the state, with record-breaking weeks reported for one popular tourist area. An auto dealers' exchange stated that volume ran substantially above year- earlier levels in recent months, and used car prices continued to rise. One of the largest auto dealers in the District noted that profitability has been improving to a somewhat greater extent than volume. Inventories are leaner and consumers "aren't beating us upon price so much." A manager of shopping center properties reported that sales growth for the stores in its centers in the District seemed little changed thus far in the third quarter. This contact noted relative strength in department store sales results, and was encouraged that consumers seem increasingly focused on value as opposed to price alone.

Housing and Construction
Bad weather and hesitancy among producers has impeded residential construction activity through much of the year, but discussions with housing industry contacts suggested that the underlying tone of the home sales market remained firm. An association of realtors stated that local bonds have been reporting further improvement in sales activity and buyer interest during the third quarter in Illinois. A realtors' association reported a significant increase in home resales in Wisconsin during July, and year-to-date sales are now ahead of a record breaking year-earlier period in spite of relatively weak results in early 1993. One of the largest residential realtors in the District reported a return to a record selling pace in July, after some softening in its markets during the second quarter, and early August results remained encouraging. A survey of residential mortgage lenders in Western Michigan showed a pickup in origination growth in recent months. Two mortgage lenders reported significant improvement in the housing market in the Detroit area.

Bad weather and the effects of flooding restricted shipments of construction materials through July and early August. A gypsum wallboard producer expected industry shipments to rise somewhat less than earlier expected this year, but shipments to the Seventh District were still expected to post a modestly higher gain than in the nation as a whole. A large cement producer reported relative strength in shipments for light industrial construction, which combined with extensive public works activity to boost overall shipments in the absence of improvement in the weak commercial market. This contact stated that "we definitely see some better times ahead." A cement industry association stated that bad weather did not affect production, but shipments were delayed in some parts of the region.

Manufacturing
Purchasing managers' survey results and reports from manufacturers indicate that industrial output in the District flattened out (on a seasonally adjusted basis) during the seasonally slow months of July and August. Light vehicle assemblies had been scheduled to surge in the third quarter, but underbuilds during August have pared those expectations. One large automaker expected output to continue to increase on a seasonally adjusted basis in the third quarter, and this contact expressed confidence that assemblies would continue to climb into the fourth quarter. Light vehicle assembly gains in the District have significantly exceeded the national average thus far in 1993, and District production should benefit when one large facility reopens later in the year. A steel producer selling into niche markets reported that their order books were full through October and November. Improvement in demand remains widespread by customer grouping, according to this contact. A steel industry analyst stated than continued relative strength among steel service centers is another sign that improvement in demand has been generalized, and not confined to auto and appliance manufacturers. A large electronics and communications company stated that strong bookings growth continued, particularly in orders from Asia. A heavy-duty truck industry analyst reported that net orders in July climbed to their highest level for that month since 1978. The increase was partly driven by promotions, but there was little sign of an orders slowdown in preliminary results for August Some small manufacturers that were closed due to flooding in July have begun the clean-up process.

Banking
Commercial, industrial and consumer lending activity generally continued to improve in recent months. Several large bank holding companies reported increased liquidity in the large corporate loan market, with a perceived strengthening in asset quality prompting greater willingness among banks to extend credit. Heightened competition has reduced the cost of credit lines and the spread of loan rates over base rates. A regional bank holding company stated that middle-market commercial loan demand is still "pretty good," with demand for working capital financing more robust than demand for fixed investment financing. Another middle-market lender stated that commercial borrowers seem to have increased their tendency to shop around for better loan terms, and competition on rates has intensified in most borrower classes, with little overall net lending growth. "We are continuing to go forward at rates we consider acceptable, but the overall market is best characterized as sluggish or weak." Auto loans still form an important source of strength in consumer lending, according to one regional bank holding company. A large retailing firm reported continued expansion in outstanding consumer credit while a large bank holding company reported that credit card write-offs have been running at their lowest pace in almost a decade.

Agriculture
Recent flooding is estimated to have led to an expected total production loss of roughly 4 to 7 percent of this year's intended crop acreage in the hardest-hit District states (Iowa, Illinois and Wisconsin). Ponding and slow crop development have considerably reduced the yield prospects on the remaining acreage in Iowa and Wisconsin. Production uncertainties continued into late August, with ongoing rainfall in much of the District. A sizable portion of the corn and soybeans in the northern half of the District remain vulnerable to a frost prior to maturity, and even a normal first frost would cause some damage to this year's late crop.