Beige Book Report: Chicago
September 11, 1996
Summary
The Seventh District economy continued to expand at a
moderate rate in August. Retail sales improved from July's pace,
with several retailers citing improved back-to-school sales from a
year ago. Commercial construction activity picked up across the
District, while residential activity varied from state to state.
Manufacturing activity remained robust, but reports were mixed as to
whether the sector was gaining or losing momentum. Overall bank
lending remained strong, despite reports of a decrease in mortgage
lending. Labor markets continued to be tighter than the nation as a
whole, but wage pressures remained subdued. High grain prices and
poor quality forage are cutting milk production.
Retail sales
Retail sales improved moderately from July to August
and were up from one year ago. Several large retailers attributed
sales gains to year-over-year improvements in "back-to-school"
items, most notably apparel. Most retailers expect this strength to
carry into September with "back-at-school" sales. Results from a
Michigan survey suggested that these sales patterns were similar for
small retailers. One major retailer pointed out that August's year-
over-year sales comparisons may be distorted because of
exceptionally strong sales of air conditioners and other hot-weather
related items in the Midwest last year. This retailer noted that
sales of appliances (other than air conditioners) remained strong,
while electronics sales (other than computers) were soft in August.
Computer sales were reported to be strengthening, in part due to
improved back-to-school sales. However, a major discount chain
reported that sales in District states were at or below
expectations, with weakness in big-ticket items--small appliances,
electronics, etc.--prompting plans to increase price discounting
over the next three months.
Housing/construction
While overall construction activity remained
robust during July and August, residential housing activity was
mixed. Recent data releases showed that Midwest sales of new and
existing homes increased significantly in July, but reports from
District contacts varied widely from state to state. A builder in
one large metro area described activity as "the best (residential
housing) market in 20 years," while a contact in another area
reported that "(unsold) inventory is now a concern." A national
survey of home builders suggests that sales of new homes in the
Midwest were down in August and virtually every banker contacted
reported that mortgage lending activity decreased. While most areas
reported pockets of both increasing and decreasing residential
building activity, contacts in Michigan reported increasing activity
throughout the state. Commercial building activity was reportedly
strong and increasing throughout the District in July and August.
One lumber supplier reported that strength in commercial
construction was responsible for shortages of building materials,
most notably wallboard. This source also noted that a shortened
summer building season (resulting from inclement weather in much of
May and June) strained lumber supplies and prices increased
significantly, reaching a two-year high. However, competition among
suppliers to maintain market share is preventing them from passing
along the entire cost increase to builders, whose margins have
already been squeezed. In addition, the price increases are not
expected to endure.
Manufacturing Activity
Manufacturing activity remained at a very
high level in July and August, but views were mixed about whether
momentum was building or slowing. Purchasing managers indexes across
the District jumped in August, including one metro area which had
been signaling flat activity for several months. These increases
were led by strong gains in new orders and production. Most
manufacturers contacted, however, reported that demand was flat or
moderating in July and early August. Steel producers reported that
mills were at effective capacity in August, and order books were
full through November. One medium-sized machine tool producer noted
a jump in orders in July from a year ago, while another said orders
have been below year-ago levels for several months. A producer of
heavy construction equipment noted an increase in orders, after
encouraging customers to place their year-end orders early to ensure
production and on-time delivery. Otherwise, their order intake
continued to slow across most market segments. An appliance producer
reported that domestic shipments slowed in July and August from
their stronger-than-expected pace earlier in the year. Except for
recently announced steel price increases, which appear to be
sticking, neither purchasing managers surveys nor individual reports
suggested any recent increase in price pressures.
Banking Activity
Reports from bankers generally indicated that
lending activity remained strong in July and August. Several
Michigan banks reported that business lending continued to post
solid gains. Recent merger and acquisition activity in the state
increased the demand for capital equipment-based loans. Bankers in
other areas, however, noted recent flattening in business lending
from very strong growth earlier in the year. A major regional bank
cited double-digit growth in consumer loans from a year ago. Rising
delinquency rates, while still low, encouraged some smaller banks to
shift their emphasis from installment loans, including credit cards,
to equity loans.
Labor markets
Labor markets remained tighter in the District than
in the nation as a whole, with the unemployment rate in July
virtually unchanged for the fifth straight month. Manufacturing
employment continued its slight decline in July, but purchasing
managers surveys suggested that payrolls were again increasing in
August. Temporary help agencies also reported that "the industrial
segment of the business is tightening up." Shortages of
construction, skilled clerical, and technology workers persisted
throughout the District. Despite the tight conditions, most contacts
reported no discernible acceleration in wage pressures. One survey
of small retailers in Michigan, however, suggested that smaller
firms across the state were raising their starting wages to attract
qualified workers. The survey also noted that the added costs were
being absorbed by the retailers, rather than passed on to consumers.
Agriculture
Corn prices remained high in August, but down sharply
from the very high levels of late spring, early summer. The extreme
tightness in old-crop supplies was being overcome by cancellations
and deferrals in export orders, the curtailed operations of many
processors (especially ethanol plants), the use of alternative
grains for feeding livestock, and regional imports of newly
harvested grain from southern states. New crop prospects remained
mixed, with sizable portions of the District's late-planted corn and
soybean crops in a close race to reach maturity prior to normal
first-frost dates. Meanwhile, evidence of scaled-back production
among the District's dairy farmers continued to mount. Milk
production during June and July was down 5.5 percent in District
states and down 2.1 percent elsewhere. The cuts reflect fewer dairy
cows and less output per cow. High grain (feed) prices and poor
quality forage accounted for the abnormal decline in the
productivity of dairy cows.