Beige Book Report: Chicago
May 4, 1994
Summary
Seventh District economic conditions continued to improve in March
and April, with retail sales boosted by substantially greater
improvement in the weather than the norm for this time of year.
Aside from the weather effects, the underlying upward momentum in
consumption and housing activity may have slowed somewhat from the
unusually rapid fourth quarter pace. Reports from manufacturers
generally remained quite upbeat, although a number of manufacturing
contacts expressed greater uncertainty about the pace of activity in
their markets in the latter half of 1994, citing the effects of
increases in interest rates. Reports of price increases remained
concentrated in building materials and metals industries. Early
planting and weaker export prospects are currently weighing on crop
prices, but District farmland values continued to appreciate in
early 1994.
Retail Sales and Housing
Consumer spending and housing activity continued to expand in the
District in recent months, aided by substantial improvement in the
weather following unusually harsh conditions earlier in the year. A
large general merchandise retailer stated that underlying sales
momentum remained positive through early April, with sales of home
furnishings and other housing-related items still leading overall
sales growth. This firm's outstanding consumer loans are sill
rising, while delinquency rates continue to decline. Another large
national retailer reported that its sales growth slowed in April on
a holiday-adjusted basis. A large retail chain concentrated in the
District reported that sales of seasonal items, such as lawn and
garden and sports equipment, improved in line with plan during March
and April. A group of retailers in Michigan reported improvement in
apparel sales growth during March, and a large general merchandise
firm also reported better apparel sales gains in March. A commercial
real estate firm expected new shopping center construction in the
Chicago area to rise nearly 40 percent in 1994, partly due to the
entry of new chains in the local market, and some financial industry
contacts expressed concern about the pace of new retail space
creation in the area.
A large realtor reported that existing home sales transactions were about in line with last year, but noted that listings have been moving down for the first time in a long time. This contact stated that higher mortgage interest rates probably brought more buyers into the market in the first quarter, potentially borrowing from sales later in the year. A large association of homebuilders in the Chicago area reported that traffic increased from strong year- earlier levels In the first quarter, but then fell off during April. While many builders have expressed concern about the impact of higher mortgage interest rates, this contact believed buyer confidence remains strong.
Manufacturing
Manufacturing activity continued to lead the District economy in
March and early April. Purchasing managers surveys in Chicago,
Detroit and Milwaukee suggested that manufacturing output growth in
the District picked up further momentum in the first quarter,
following significant gains in the fourth quarter of 1993.
Purchasing managers' surveys conducted in Western Michigan suggested
that strong growth continued in late March, with gains led by the
auto industry. A steel industry analyst stated that "integrated
mills are still going full out," as automakers continue to push for
order fills. Heavy-duty truck orders surged to an all-time high in
March, according to an industry analyst, and retail sales bounced
back following slower, weather-impacted results in January and
February. Shortages of construction machinery are developing sooner
in the year than they did last year, according to an industry
analyst. A large regional bank stated that its mid-sized
manufacturing customers are still generally enjoying "very healthy"
orders gains, led by firms in automotive and machine tool-related
industries. A large manufacturer of communications systems stated
that growth in systems installations was still running in line with
the healthy results for the fourth quarter, with especially strong
results in Northern Illinois. A large diversified manufacturer
reported a pickup in industrial chemical sales in Europe, although
its sales of agricultural equipment in Europe remain relatively
weak. A large electronics manufacturer reported that its worldwide
bookings continued to grow at a rapid pace in late 1993 and early
1994, but the growth rate may have slowed slightly in recent months.
Autos
Auto industry contacts reported that sales results thus far in April
pointed to a modest slowing in seasonally adjusted sales rates.
Discussions with a wide variety of auto dealers were mixed but
generally positive, although one of the largest dealers in the
District noted that "it seems like someone just turned off the
faucet," citing interest rate increases and customer concern with
their losses in financial markets. Several banking contacts noted
that residential refinancing has "dried up," and one regional
analyst expected this to inhibit auto sales in coming months. Auto
dealers in Michigan reported substantial strengthening in April
sales, as consumers rush to beat a state sales tax increase slated
for May. Auto suppliers in the region continued to produce at high
levels, and one large auto supplier stated that the run-up in long-
term interest rates in early 1994 has not yet affected its
expectations for significant growth in 1994. Year-over-year growth
in motor vehicle assemblies in the District continued to post larger
increases than the nation as a whole in early 1994.
Agriculture
Most areas of the District have experienced warm and unusually dry
weather patterns this spring, although there was some localized
flooding in mid April. Crop farmers responded with faster-than-
normal progress with field work. The pace picked up dramatically
during the week ending April 23, when corn planting began in earnest
in most areas. The early start has buoyed prospects for the 1994
harvest, which has combined with a weak pace in export shipments to
weigh on crop prices.
The latest survey of District agricultural bankers found the farmland market strengthened further this winter. The two percent gain reported for the three months ending with March was fairly widespread throughout the District, and it was the largest such increase in several quarters. The volume of farmland transfers picked up during the winter months, fueled both by a stronger demand among buyers and a pick up in offerings for sale.
Prices
Reports of price increases remained concentrated in metals and
building materials markets. A steel industry analyst stated that
steel prices are "definitely moving higher." Negotiations between
integrated mills and automakers have taken on a more "commercial"
tone, as opposed to a dictatorial character in recent years. Steel
price increases are concentrated in special orders for nonstandard
sizes that take more time to fill, as production time has become
more valuable at current levels of capacity utilization. Steel scrap
prices have stabilized in recent months, however, after exploding
last year. A large bank stated that its mid-sized manufacturing
clients are still unwilling to pass on metals price increases, and
"for the time being, are willing to eat them." A large association
of homebuilders stated greater lumber shortages are expected during
the summer, along with new shortages of dry wall. A large
manufacturer of a variety of chemicals has not experienced
significant price increases for inputs, while competitive pressures
continue to dampen its own prices and margins. A large auto supplier
stated that it has recently received price increase notices from its
suppliers, but has been successful in resisting those requests, and
remains unable to implement price increases to its large automaker
customers. A large electronics manufacturer noted that price
increases for components sold to the auto industry seem to have
become more feasible, but they haven't been implemented, noting that
"we don't want to pay the price when the downside arrives." Two
large retailers each stated that prices paid by their customers
continue to decline, on balance. The price component of the Chicago
purchasing managers' survey indicated modestly faster price
increases in early 1994, but this index remained below year-earlier
levels, and considerably below its average level in 1988 and 1989.