Beige Book Report: Chicago
March 9, 1994
Summary
Harsher-than-normal winter weather put a chill on the District
economy, but the underlying momentum in business activity remained
quite positive. Manufacturing activity continued to lead the
expansion. with auto production providing a major source of
strength. In each District state, unemployment rates closed out 1993
at (or very close to) their lowest levels since 1977. Survey data
and help-wanted advertising suggested that hiring plans rose
significantly in early 1994. Purchasing managers surveys pointed to
a somewhat faster pace in price increases, much as they did when
growth strengthened at this time last year. Nonetheless, evidence of
broad-based or significant price increases remained relatively
modest.
Manufacturing
District manufacturing activity continued to expand at a moderate
pace in January and February. The composite production index of
purchasing managers surveys in Chicago, Detroit and Milwaukee rose
slightly from the high level reached in the fourth quarter of 1993,
in spite of the deterioration in the weather. After climbing sharply
in January. the production index for Chicago registered no change in
February, remaining at one of its highest levels in the past four
years. Results for two surveys in Western Michigan remained quite
strong in late January, when the weather was at its worst, and the
survey organizer noted that results in one survey were the strongest
since 1985. A utility in Michigan noted that power sales rose from
December to January on a seasonally adjusted basis, after adjusting
for the deterioration in the weather, with sales gains led by
industrial customers.
Heavy-duty truck orders and output surged in the fourth quarter, and an industry analyst reported that assemblies rose further from December to January. Parts shortages are playing a more important role than bad weather in constraining heavy-duty truck production, according to this contact. A construction machinery industry analyst reported that manufacturers were raising production and building inventory to a greater extent than expected during the fourth quarter. A survey of freight forwarders showed sharply higher expectations for trade activity in coming months. District steel output rose 6 percent above year-earlier levels in the first three reporting weeks of 1994, but then plunged during the worst week of cold weather. Even so, output for January as a whole was 2 percent higher than January 1993, and reached the highest January level in the past five years. District steel output recovered only modestly in February, however, with faster growth evident for production in the nation as a whole.
Autos
Bad weather slowed production growth in the auto industry, as it did
in almost every sector in the District. Even so, the underlying
momentum in the industry remained quite positive. Automakers
reported that car sales actually rose on a seasonally adjusted basis
in January, in spite of the weather. Fleet sales rose only slightly
on a seasonally adjusted basis, according to these contacts, and
only accounted for a small part of the month-to-month increase in
overall sales. A large automaker based overseas reported that sales
in January in the District were slightly higher than year-earlier
levels, in spite of the weather. "The buyers are out there, and the
outlook for the first quarter as a whole is very optimistic." After
surging in the fourth quarter, District light vehicle output is
expected to continue to grow in line with, or slightly faster than,
the national average. Weather-related production postponements were
disproportionately concentrated in the District in January, and
sales expectations are high for some new models produced in District
plants. Suppliers in the region also report sharply higher domestic
parts purchasing plans for transplant assembly operations.
Consumption and Housing
Discussions with retailers indicated that District consumer spending
continued to increase during January and February on a seasonally
adjusted basis, after surging during the fourth quarter. One large
retailer stated that sales certainly weakened on the worst weather
days, but the losses were almost always recaptured when the weather
improved. This firm's sales in the region continued to rise in
January and February on a seasonally adjusted basis, after
strengthening significantly in the fourth quarter. Durable goods
continued to lead overall sales gains. Another large retail chain
noted that sales growth remained on the higher path established late
in the holiday season. This contact stated that weather disruptions
were isolated to a few days, with only a marginal impact on overall
sales. A survey of a large number of smaller retailers in Illinois
and Indiana continued to show an improving trend in recent months.
Home sales and construction activity surged in the region as 1993 came to a close, with little sign of a slowdown in the underlying momentum thus far in 1994. Some realty and banking contacts attributed at least part of the increased activity to home buyers' beliefs that mortgage interest rates may have stopped declining, leading sonic to conclude that the recent burst in activity could prove short-lived. Still, reports from local realtor boards in the region remained quite optimistic, with most noting that sales closings rose faster in January and February than in late 1993. At the same time, the bad weather postponed home showings, which could be followed by slower growth in closings in March and April. One of the largest realtors in the District reported that transactions in January rose over 30 percent from year-earlier levels, partly due to special factors, but results were still a good deal better than expected.
Employment
Seventh District labor markets also continued to strengthen in late
1993 and early 1994. Unemployment rates ended 1993 at or below their
lowest level since 1977 in each District state, and help-wanted
advertising has been on the rise in the region in recent months. A
survey showed further gains in hiring plans among Midwest employers
during January and February, after significant improvement during
the fourth quarter. A large metropolitan daily reported that help-
wanted advertising space in January was over 20 percent higher than
year-earlier levels, and space climbed consistently during each week
in February. This contact stated that "it looks like employers are
beginning to tee it up." A large personnel recruitment firm noted
that permanent placements growth slowed in early 1994, mainly as a
result of a shortage of job candidates. An analyst of labor markets
in Western Michigan reported that strong improvement in employment
in the fourth quarter was led by manufacturing payrolls. Scattered
reports of worker shortages in Western Michigan have been
supplemented by a high level of average hours worked in the region
(well above the national average) and growth in help-wanted ads.
However, several large District manufacturers emphasized that their
employment remained on a long-term downtrend, in spite of recent
improvement in orders and output, and a large auto supplier reported
that recent hiring has been confined to production workers.
Agriculture
A quarterly survey of agricultural bankers indicated that farmland
values and credit conditions varied significantly around the region,
with the effects of flooding in 1993 playing an important role.
Bankers from Illinois and Indiana reported significant gains in
farmland values, as farmers in these states experienced an above
average harvest for 1993, along with sharply higher crop prices.
Conversely, bankers in Iowa and Wisconsin reported flat to modestly
higher farmland values, as many farmers in these states experienced
sharply lower yields during 1993. Farm loan demand was also reported
to strengthen in most areas, accompanied by ample funds for lending
and further declines in the rates charged by banks on loans to
farmers. Loan repayment rates weakened in areas hardest hit by
flooding in 1993, but improved in most other areas of the District.
Capital expenditures by farmers are expected to be weak in Iowa and
Wisconsin this year, but strong in the other District states.
Prices
The price components of District purchasing managers' surveys
generally suggested that purchased materials prices rose at a
moderately faster pace in early 1994 (on a seasonally adjusted
basis) than in late 1993, similar to the pattern when production
growth strengthened at this time last year. The price component of
the Chicago survey moved back down slightly from its January level.
Most discussions with businesses suggested that upward price
movements remained modest, even in some markets experiencing
relatively strong demand growth. For example, two large capital
goods manufacturers with strong sales gains each reported that in-
house price indexes for their own purchased materials were flat or
only increased slowly in recent months, with little change in trend
since the third quarter of 1993. Another large capital goods
manufacturer reported that signs of production bottlenecks among
suppliers are spotty at best. While suppliers are testing price
increases, this firm does not expect most of them to prove
sustainable. Weak overseas economies and underutilized capacity
among foreign competitors continued to weigh on output prices in
domestic markets, according to this contact, and its own prices
actually declined, on average, during 1993. Scrap steel prices
surged in 1993, but have remained flat in recent months. However,
capacity constraints and upward price pressures have been noted with
increasing frequency and intensity by producers of building
materials.