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Beige Book Report: Chicago

March 15, 1995

Summary
Seventh District economic activity generally remained brisk in early 1995. Signs of slower growth were concentrated in housing activity and the auto industry, but realtors, retailers and auto dealers generally remained optimistic about future sales growth. Overall manufacturing output continued to expand at a moderate to vigorous pace. Conditions in the agricultural sector held up better than expected, and land values posted the greatest annual increase in 1994 in the past six years. Surveys and reports from staffing services firms indicate that District labor markets remained tight, with little evidence of any significant change in employment growth since the fourth quarter.

Manufacturing
District manufacturing activity generally remained vigorous in early 1995, after closing out 1994 on a high note. The composite index of production components in purchasing managers surveys for Chicago, Detroit, and Milwaukee showed continued robust expansion in output in January and February, in contrast to the slower growth indicated in the national data. Responses from auto suppliers and other cyclically-sensitive industries contributed to a slower (but still substantial) growth rate indicated in surveys in Western Michigan. At the same time, however, the production component of auto industry responses to the Detroit purchasing managers' survey actually increased in January and February. A large distributor of industrial materials stated that its own sales growth shows no sign of slowing. "If you asked me two months ago," this contact observed, "I would have expected a slowdown in the second half of this year. No longer." New capacity expansion projects by manufacturers have boosted this firm's growth in sales to construction contractors, while direct sales to manufacturers remained strong. An industry analyst reported that construction machinery sales remain robust in the face of higher interest rates, with greater strengthening in nonresidential construction spending expected to bolster industry sales growth further in coming months. A manufacturer of industrial equipment stated that demand has held up very well in recent months, although a higher share of customers choose to rent (rather than buy) equipment. A manufacturer of products linked to housing activity stated that orders slowed in early 1995; "our backlog is still huge, but at current order rates we can probably say good-bye to seven day workweeks."

Housing
Housing activity showed continued signs of slowing, but activity remained at relatively high levels and most realtors remained upbeat. An association of realtors in Wisconsin reported new year- over-year declines in transaction volume, but stated that "these figures are still pretty strong." One large realtor stated that sales normally pick up substantially in February compared to January, but did not do so this year, and this contact stated that "the last two rate increases seem to have put a damper on things." Nonetheless, "prices are still appreciating, we have plenty of buyers calling, and underlying demand remains strong." One of the largest realtors in the District reported that transactions strengthened somewhat in recent weeks, after rising interest rates and uncertainty about their future direction curtailed sales in the fourth quarter. "We've been a little surprised, and salespeople actually seem to be getting a little bullish again."

Retail Sales
Surveys and reports from large chains revealed little change in the pace of retail sales growth in the District. A large retailer reported that its underlying sales momentum was slightly stronger in recent months on a seasonally adjusted basis, led by continued strength in home furniture sales and new strengthening in women's apparel. This contact stated that consumers "are still shopping closely to need, as opposed to impulse." A major retail chain stated that its durable goods sales growth moderated in recent months, despite increased promotional activity. This contact stated that inventories have risen above plan in some product categories (including appliances), but the company has not yet reduced its orders below previous plans. A large manufacturer of durable goods stated that orders from dealers and retailers remained "amazingly strong" in recent weeks, with no sign of any change in momentum since late 1994. The majority of Michigan retailers anticipating future sales growth in a monthly survey reached its widest margin since last October, although some modest slowing in current sales momentum was also indicated.

Discussions with auto dealers were mixed, with the majority indicating some slowing in sales momentum in early 1995. One of the largest auto dealers in the District reported that traffic and sales turned busier in the latter half of February and early March, however, after slowing significantly in January and early February. This contact has not pulled back on orders from its earlier plans; "we've been able to get some extra vehicles, unlike last year when things were really tight and we're taking everything we can get." This dealer expected sales to improve in coming months. Commenting on a competitor's financing promotion, this contact stated that "if we did that, we just couldn't get enough vehicles to sell." Another large auto dealer also reported weak sales in early 1995, partly due to vehicle price increases. This contact stated that sales would likely increase from 1994 to 1995, if interest rate changes stabilize or become less prominent.

Agriculture
Conditions in the District's farm sector are holding up better than had been expected. Hog prices have improved considerably from the inordinately low levels of last fall, permitting the most efficient producers to scratch out marginally positive returns. Moreover, unexpected trade developments with respect to China have strengthened crop exports and prices. Our survey of District agricultural bankers found farmland values continued to trend upward last fall, with the increase for all of 1994 the largest annual rise in six years. The average loan-to-deposit ratio at the end of 1994 was the highest for any year since 1979.

Labor Markets
District labor markets continued to strengthen in early 1995. Payroll employment estimates for District states were recently revised upward in the annual benchmarking process, and currently depict significantly faster employment growth in 1994 than in 1993. A recent survey by a large temporary help company showed further strengthening in Midwest employers' hiring plans in the first quarter of 1995, after this index climbed in 1994 to the highest annual average in the survey's 18-year history. This survey showed stronger hiring plans among manufacturers than the overall regional average, as has been the case since 1991, and purchasing managers' surveys also depicted stronger manufacturing employment growth in recent months. A survey by a large executive recruiting firm indicated that planned hiring of middle managers and professionals climbed in early 1995 to the strongest pace since 1984, with the North Central region showing the strongest hiring plans in the nation.

A large staffing services firm saw "no sign of a slowdown" in its own temporary placements growth in early 1995. Another staffing firm stated that "there's more business than we can handle, and a tremendous shortage of applicants." This firm expected somewhat greater upward wage pressure in coming months. A staffing firm specializing in professional services reported that robust billings growth continued in recent months. "Clients are more than willing to ante up" if a good candidate is successfully recruited. The manager of recruitment advertising for a newspaper stated that "right now, we couldn't kick the business out of here with a stick." Help-wanted advertising in an industrial materials newsmagazine climbed to record levels in recent weeks. A regional analyst stated that labor shortages in Western Michigan continued to intensify, and noted increasing reports of business expansion plans being constrained by worker shortages.

Prices
Manufacturing input price increases showed little sign of ebbing, while a growing number of industrial contacts suggested that output price increases grew more feasible. Large retailers continued to stress intense competition, however, with little if any room for price increases. The price components of the District purchasing managers' surveys remained high or increased further in early 1995. The Chicago price component climbed in February to its highest level since July 1988 and its second highest level since early 1980. A distributor of industrial materials stated that its prices continue to escalate, and perhaps at a higher rate; hikes in base metal prices continue, while product shortages have grown more frequent. A plastics industry analyst stated that resin prices were still climbing, with prices for some products reaching all-time highs. Several large manufacturers stated that the strengthening recovery in Europe may have eased pricing constraints facing manufacturers, as import supplies become increasingly light. Commercial rents in the region have been on the rise as vacancy rates decline, according to realtors, with particularly strong rent increases noted for industrial space. A distributor stated that lumber prices have eased in recent months, however, citing slower demand from housing construction contractors.