Beige Book Report: Chicago
September 14, 1994
Summary
Seventh District economic activity advanced at a modest pace in
recent months, as capacity constraints in manufacturing joined
slower retail sales growth and housing activity to restrain the pace
of expansion. Survey data and reports from large retailers were
mixed, with little evidence of a change in trend following the
slower growth witnessed during the second quarter. Manufacturing
activity generally remained vigorous, except where hampered by
production difficulties. Labor markets continued to strengthen;
worker shortages grew increasingly frequent, and temporary help
companies reported rising wages and higher recruitment costs. Prices
of industrial commodities and building materials continued to trend
upward.
Retail Sales
Reports from District retailers suggest that sales continued to grow
at a slow pace in July and August. A regular survey of retailers in
Illinois and Indiana showed continued modest year-over-year sales
gains during May and June, on the heels of stronger increases during
the first quarter. In July, this survey showed a somewhat more
clear-cut loss of momentum, particularly in the hardware and
homebuilding category. A survey of sales paid by check also showed
modestly slower growth in the Midwest during July. However, a
significant majority of small retailers surveyed in Michigan
anticipated sales gains over the next few months (after adjusting
for normal seasonal trends), with expectations running well ahead of
assessments of current sales activity. This survey also showed a
greater majority anticipated near-term inventory expansion than
those reporting that stocks rose over the past month. One large
discount retailer noted that sales in its District stores continued
to grow at a modest pace during recent months. A large apparel
retailer reported a positive consumer response to new apparel styles
in the early stages of the fall season, which was believed to be a
good sign for sales over the next few months. Automakers indicated
that limited supplies accounted for much of the recent slowdown in
light vehicle sales. One of the largest auto dealers in the District
reported that sales and buyer traffic have flattened out at mediocre
levels, after weakening during the second quarter. Limited supplies
have constrained new vehicle sales, and used cars have accounted for
an increased share of the overall sales mix. This contact stated
that weaker demand has also dampened new car sales since March,
however.
Manufacturing
District industrial output generally remained vigorous, although
production difficulties and capacity constraints have hampered
growth in a number of industries. A composite index of the
production components of purchasing managers' surveys around the
District has been in a modest downtrend since April, but remains at
a level consistent with relatively strong gains in output. An
industry trade association reported that appliance shipments ran at
a record level for the month of July, although the report implied a
small decline in shipments of core products from June to July on a
seasonally adjusted basis. Net orders for heavy-duty trucks declined
slightly from June to July, and remained at very high levels.
Current build plans suggest heavy-duty truck output will flatten out
during the balance of 1994, with one industry analyst noting that
the industry is "at capacity, with supplier limitations basically
setting the limits." A number of manufacturers of heavy equipment
and building materials announced new capacity expansion projects.
One of these firms continued to forecast stronger sales growth than
anticipated in early 1994, and expected interest rate increases thus
far in 1994 to have little impact on demand over the balance of the
year.
Housing/Construction
Housing sales and residential construction activity remained at
relatively high levels, but growth has clearly slowed from the
strong pace set last year. New and existing single-family home sales
have been trending downward in the Midwest during 1994, and a number
of bankers noted that mortgage loan applications for home purchases
have weakened during the year. Likewise, homebuilders have been
reporting significant declines (from high levels) in prospective
buyer traffic. One of the largest realtors in the District reported
that sales were trending lower during the second quarter, but held
up relatively well in July. This contact stated that sales force
optimism has been tempered in recent months, but remains positive.
Construction contract awards showed weakening year-over-year
comparisons in the District during the second quarter, both in
residential and nonresidential building. Building remained active,
however, and a study by a local development firm showed continued
high rates of absorption of industrial space in the Chicago area.
Gypsum wallboard shipments ran at a slightly slower pace than
anticipated in June and July, according to one large manufacturer,
with stronger nonresidential building activity bolstering overall
demand in the face of slower growth in residential construction.
Labor Markets
Surveys and reports from staffing services firms indicated further
strengthening in District labor markets, with reports of worker
shortages growing somewhat more frequent. A quarterly survey
indicated that employer hiring plans held at high levels during the
third quarter. Nationally, this survey showed that durable goods
manufacturers planned some of their strongest hiring in the past 16
years, and hiring plans among Midwestern durable goods manufacturers
remained significantly above their national counterparts. The
employment component of purchasing managers' surveys around the
District generally continued to rise during recent months, with a
small but growing number of respondents commenting about a short
supply of skilled labor. The employment component of the Chicago
survey has recently been hovering near its highest levels in the
last 16 years.
Staffing services firms reported further strengthening in demand for temporary and permanent employees, with a continuing trend towards conversion of temporary employees to permanent status. August is a normally a busy month in the temporary help industry, and it was especially busy this year. These companies generally expect their business to continue to strengthen over the balance of 1994 on a seasonally adjusted basis. Most of these firms reported that the supply of better-qualified labor has grown increasingly scarce, and wages offered temporary workers are rising. One firm has noted higher wages offered in its competitors' help-wanted advertising. A number of staffing firms reported higher recruiting costs (as did a large distribution services company). Some temporary help firms noted that increased competition has restricted (but not eliminated) the ability to pass on higher wages in the prices charged to their client companies. Wages paid in permanent positions at their client companies do not yet seem to be under the same upward pressure for a similar temporary position, according to one temporary help firm, but "we think we see it before they do." Two firms separately reported that the wages paid to their temporary employees have increased roughly 5 to 10 percent, on average, during 1994.
Agriculture
A bumper fall harvest still appears to be in store for much of the
District. Crop condition ratings edged lower in recent weeks,
however, as cool temperatures and dry conditions over portions of
the District slowed the final stages of crop development. Along with
reports of problems with the wheat harvest in several foreign
countries, these conditions have halted--at least temporarily--the
recent sharp decline in crop prices.
Prices
Purchasing managers surveys and trade information generally pointed
to continuing price increases for industrial commodities and
building materials. The price component of the Chicago purchasing
managers survey climbed especially sharply during August. Scrap
steel prices hinted and rose anew in the Chicago area in recent
months, after dropping off significantly in March and April, and an
industry analyst expects further gains in the latter half of the
year. Gypsum wallboard prices rose in August, the second such wave
of moderate increases this year, and there was little sign of any
weakening in orders following the latest increases. Corrugated paper
prices have fallen somewhat in recent weeks, after substantial
increases during 1993 and early 1994. Retailers continued to
emphasize that competitive pressures significantly constrain their
own price increases, however, and a recent survey showed a
substantially higher share of retailers expecting increased
promotional activity than rising prices.