Beige Book Report: Chicago
November 1, 1995
Summary
The Seventh District economy continued to expand moderately in
September and early October. Retail sales growth rebounded in
September from heat wave-depressed levels in August and then turned
mixed in the first two weeks of October. Stronger housing activity
is anticipated to help prompt greater retail sales gains in the near
term, but several large retailers expressed more caution about
growth prospects in 1996 than they did in previous months. Consumer
durable goods production has taken the lead in District industrial
output growth, while increasingly mixed messages have arisen in
previously strong capital goods industries. Labor markets remain
relatively tight, and reports of rising wages in entry-level
positions have grown increasingly frequent. However, surveys of
retailers and manufacturers showed little sign of accelerating price
increases.
Retail Sales
Retail sales rebounded in September from heat wave-depressed levels
in August, but October sales reports were mixed. Weather played the
most important role determining recent department store sales
patterns, with sales strengthening during colder weather in early
October, and fading during unseasonably warmer weather during mid-
month. Retailers generally remain optimistic about prospects for the
holiday season, partly because of a longer-than-usual holiday season
this year. Several large retailers expressed greater caution about
sales prospects in 1996 than they did in previous months, however.
One large retail chain reported pronounced weakness in customer
traffic in its own and its competitors stores in the first two weeks
of October. This chain reduced its orders and inventory plans
slightly, and anticipated further retrenchment and greater
promotional activity in the absence of a turnaround. Another large
department store chain characterized recent trends as simply "okay,
on balance" noting sharply increased volatility in within-month
sales results. This contact reported that the tardy arrival of back-
to-school and other seasonal sales prompted extraordinarily large
year-over-year sales gains in mid-to-late September, followed by
weaker results in early October. Retailing contacts remained
optimistic that gains in sales of housing-related items would
strengthen in line with traditional lags following stronger housing
activity. A survey of retailers in Iowa showed inventory plans were
in line with or slightly stronger than year-earlier intentions,
while a survey of retailers in Michigan showed that inventory and
hiring plans for coming months had risen in line with strong year-
earlier levels. However, auto dealers in the region reported slowing
traffic and sales in recent months, and many have cut back their
orders and inventory plans.
Housing
Survey data and discussions with realtors, homebuilders, banks and
lumberyards indicate that home sales continued to strengthen during
September and early October. Favorable weather enabled home
construction to finish the peak building season at a high level of
output. One of the largest realtors in the District reported that
sales strengthened significantly in August and September, and noted
that "our salespeople are all quite upbeat." Banks reported strong
home loan applications and closures; one large bank closed a record
number of home loans during September. Apartment rents were reported
to be rising at a slightly faster pace this year than earlier in the
1990s; lower vacancy rates have squeezed out incentives, and owners
have also passed on increased interest costs under adjustable rate
mortgages. Homebuilders' appraisals of current and expected sales
activity continued to improve from low second quarter levels. A
survey showed homebuilders' responses in the Midwest remained the
strongest among the four regions in the nation, and well above year-
earlier levels. An association of lumberyards stated that members'
requests for association services had dried up in the past month.
"If our phones aren't ringing," this contact stated, "then the
dealers are busy. Right now, it seems like they're busy from dawn to
dusk."
Manufacturing
District purchasing managers surveys show stronger industrial output
in the region in August and September, with little renewed upward
pressure on input prices. District steel output rose sharply in
September; it fell back slightly during early October, but remained
well above year-earlier levels. One steel industry contact stated
that demand from auto and appliance producers prompted much of the
September increase in output in the region, but demand from
construction machinery manufacturers weakened somewhat. Steel
production plans for the fourth quarter have increased slightly in
recent months, but this contact quickly noted "it's not a boom, mind
you." An auto industry analyst stated that fourth quarter auto
production schedules imply a substantial increase in assemblies
during the fourth quarter. Distributor sales of appliances in the
first two weeks of October continued to strengthen relative to year-
earlier trends after weakening in the second quarter and into early
July. An appliance industry analyst stated that housing activity has
proven stronger than expected earlier in 1995, and a large
manufacturer expected a modest gain in appliance shipments in 1996.
Signs of slowing have arisen within the District's capital goods sector, notably among producers of construction equipment and heavy- duty trucks. A construction equipment industry analyst stated that retail sales in the fourth quarter are expected to be flat to down slightly from last year, as an uptick in activity in August doesn't seem to have followed through into September and October. Sales remain at high levels, and recent strengthening in housing activity is still expected to boost construction equipment sales by the second quarter of 1996. Nonetheless, this analyst characterized manufacturers' current inventory as "high for all types of machinery." Another analyst reported that heavy-duty truck order cancellations have risen sharply in recent months. Order backlogs have declined considerably, albeit from dramatically high levels. Even so, current production schedules imply a small decline in heavy-duty truck output in the fourth quarter, and another trucking industry observer estimated that fleet utilization slipped further in the third quarter on a seasonally adjusted basis. A large manufacturer of locomotives also reported slower new orders in recent months.
Labor Markets
District labor markets continue to tighten, and reports of wage
increases in entry-level positions grew increasingly frequent.
Unemployment rates in District states remained at or near their
lowest levels in the past two decades. Help-wanted advertising
firmed up in the region in the third quarter, climbing back in line
with first quarter levels. Initial claims for unemployment insurance
in the region declined in recent months relative to year-earlier
trends. In the manufacturing sector, the employment components of
District purchasing managers' surveys slipped in the second quarter,
but firmed up during the third quarter, and remained substantially
above their averages for 1990, 1991, and 1992. Manufacturers' hiring
plans remained stronger than the overall Midwest average in the
latest hiring survey conducted by a large temporary help company,
and several manufacturers reported increasing entry-level wages to
attract new hires. A temporary help company reported that employers
in its market area have increasingly displayed wage rates in help-
wanted advertising. An auto supplier reported high and increasing
turnover, and expressed concern that at current unemployment rates
deer-hunting season could cut into output to a greater extent than
usual this year.