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Chicago: March 1994

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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.