Beige Book Report: Chicago
September 13, 1995
Summary
Extended hot, humid weather weighed on District economic activity
during August, but the underlying momentum remained positive and
expectations seemed generally improved in recent weeks. The effects
of the weather on retail sales were pervasive and negative on
balance, but retailing contacts generally expected stronger sales
over the balance of the year. Reports from realtors suggested that
home sales continued to rise, while homebuilder optimism improved
further. Manufacturing output stabilized, but production has yet to
rebound significantly from a weak second quarter, partly due to the
extreme summer heat. Employer hiring plans were little changed from
the second quarter, and labor markets in the region remain
relatively tight. Extremely warm temperatures and limited rainfall
have probably trimmed the prospective corn and soybean harvest from
earlier estimates. Industrial input price increases generally
continued to ebb.
Retail Sales
Hot, humid weather dampened District retail sales growth in August,
but the underlying momentum remained positive, and most retailing
contacts remained optimistic about the balance of 1995. In late
August, one large apparel retailer stated that "we're expecting a
pretty good pop when this clears up;" hot weather delayed sales of
newly arriving fall merchandise, but boosted summer clearance. A
large general merchandise chain characterized its overall inventory
as "in extremely good shape," partly due to favorable clearance
sales. This contact reported that sales gains over the Labor Day
weekend, while mixed by merchandise category, were generally in line
with the growth pace during August. Reports from home improvement
and building material store chains suggested that hot weather slowed
construction and demand for lumber in the region in August,
constraining a rebound from a weak second quarter. Most of these
retailers remained optimistic about sales over the balance of 1995;
one stated at the end of August that "our order files are full, and
the trend is real strong right now." A used car auction observer
noted that prices have risen in recent months, and stated that "we
are expecting the balance of the third quarter to be real strong." A
survey of Michigan retailers suggested that sales growth increased
in recent months, while inventory plans rose further. This survey's
organizer stated that "optimism has reached its highest level since
March."
Housing/Construction
Reports from realtors indicated that existing home sales continued
to strengthen. A survey showed further improvement in homebuilders'
sales expectations during August, continuing a rebound that began in
May. A 'parade of homes' recently conducted in one large
metropolitan area experienced lower traffic and sales than expected,
although the homebuilder association involved ascribed most of the
shortfall to the weather. This contact expected sales and traffic to
strengthen over the balance of the year on a seasonally adjusted
basis; "no great upswing, mind you, just some improvement." A large
homebuilder focused on entry-level homes reported sharply higher
sales gains in July and August, however, and boosted construction
plans for the balance of the year. A homebuilder supply store chain
stated that "most of our customers are expecting a big finish to
1995."
Manufacturing
District manufacturing output stabilized in July and August, but has
yet to rebound significantly following a decline in the second
quarter. District purchasing managers' surveys showed little
significant change in orders or output in recent months, but
inventories leveled off while employment firmed up. District steel
production strengthened from July to August, in contrast to its
monthly decline in the previous four years. Part of the recent
increase reflected the resumption of output at several large
facilities taken down for repairs in July, but output remained above
year-earlier levels in both July and August. Several auto suppliers
reported that purchasing delays were running longer than "normal"
for the early stages of the third quarter, and while the automotive
component of the Detroit purchasing managers' survey improved in
August, it remained relatively weak. In late August, however, a
steelmaker said that "after a slow start-up, auto output is now
running about as expected," and auto suppliers' responses to Western
Michigan purchasing managers' surveys also strengthened
significantly in late August. Reports from capital goods producers
grew increasingly mixed, after their output remained relatively
strong in the first half of the year. Current build plans point to a
modest decline in heavy-duty truck assemblies in the third quarter,
and again in the fourth quarter. One large heavy-duty truck
manufacturer stated that while net orders have fallen sharply with
higher order cancellations, new order volumes have simply been
"moderating." A large machine tool manufacturer stated that demand
from automakers remained robust, but "seems to have lost some of its
earlier urgency."
Labor Markets
A recent survey suggested that Midwest employers' hiring plans were
little changed in the third quarter. These plans remained high by
historical standards, consistent with continued positive employment
growth in the region, and stronger among manufacturers than the
overall average. Another survey showed the share of Midwest
employers planning to add mid-management and professional staff was
little changed following a sharp increase in the first half of the
year, and this indicator remained at one of its highest levels since
the late 1970s. A large temporary help company reported that demand
from manufacturing firms strengthened in August to a greater extent
than expected for the time of year. This contact stated that growth
in demand for temporary help, while slower than in 1994, was still
consistent with positive growth in overall employment in its region.
A permanent placement firm concentrating on manufacturing
occupations stated that placements rose significantly in August,
primarily in occupations closely tied to current trends in
production. A number of construction and manufacturing contacts
stated that hot weather reduced production hours in July and August,
however. Discussions with help-wanted advertising managers in the
region revealed little significant change in space or rates in the
last month, with advertising remaining at high levels.
Agriculture
Crop conditions remain quite variable around the District. However,
extremely warm temperatures and limited rainfall have probably
trimmed the prospective corn and soybean harvest from earlier
estimates. Recent reports also suggest that the Great Lakes region
had a smaller than expected harvest for vegetables-- mostly for
processing--due to the extreme summer heat.
Prices
Industrial input price increases generally continued to abate.
District purchasing managers' surveys suggested that industrial
input prices flattened out in June, July, and August. Packaging
materials price increases have dissipated, after exploding in 1994
and early 1995. While varying by grade, paper prices paid by
packaging firms have generally leveled out following their
substantial gains over the past year. One packaging company stated
that "the latest annual paper price hike letter seems to be delayed;
over the past year, I've been getting one of these every two
months." One packaging company saw little sign of any new decline in
prices among a wide variety of paper grades, except for corrugated
scrap, where prices have fallen by 50 percent over the past two
months. Commodity thermoplastic resin prices continued to decline in
August, and an industry analyst expected further declines in the
balance of 1995. Prices for stretch film plastic purchased by area
packaging companies have fallen roughly 20 percent in the past few
months, according to one contact, but still remain about 40 percent
above year-earlier levels. Building materials price increases have
gained greater headway, however.