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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.