Beige Book Report: Chicago
January 21, 1998
The Seventh District economy continued to expand moderately as the old year ended and the new year began. Consumer spending over the holiday season ended up in line with most retailers' expectations, despite unseasonably warm weather hindering the sale of some seasonal items. The normal seasonal slowdown in the region's construction activity was less pronounced than in the past, with December's warmer weather allowing more projects to be started. Manufacturers' plants continued to run near capacity, although new orders appeared to soften slightly in some industries, in part reflecting developments in Asia. Business lending activity remained brisk, and mortgage refinancing activity picked up noticeably as interest rates continued to fall. Shortages of skilled labor persisted in most areas and there were new reports of some projects being canceled as a result. Prices for most key Midwest farm commodities have declined considerably in recent weeks, adding to the likelihood of lower farm sector earnings in 1998.
Consumer Spending
Most merchants were generally pleased with December's sales results.
Consumers in the Midwest were reluctant to spend early in the month,
but sales activity picked up dramatically the week of Christmas
and continued strong through the post-holiday sales events. Despite
consumers waiting until the last moment to do their holiday shopping,
there was very little use of unplanned discounting to clear inventories.
These results were nearly universal across store types--with discounters
as pleased as department stores-- although one large national chain
reported District sales to be well below expectations, but in line
with their national results. Most merchants noted that sales of
appliances, electronics, jewelry, and consumables were exceptionally
strong, while apparel did well. Sales of some seasonal merchandise,
such as snow-blowers and outerwear, were hampered by unseasonably
warm weather in December. Despite their earlier concerns about shortages,
none of the merchants contacted indicated that the availability
of seasonal help had any discernible impact on sales.
Housing and Construction
Overall construction activity remained robust with the seasonal
slowdown less than usual. As in our last few reports, the commercial
segment was stronger than the residential side, although the latter
showed a slight rebound in December in some areas. Homebuilders
in Wisconsin and Illinois said that unseasonably warm weather had
boosted traffic in December, usually one of their worst months,
which subsequently boosted sales. Most homebuilders in the District
expect 1998 to be down slightly from last year's very high levels,
though December's strong showing made some less certain. The commercial
segment experienced a normal seasonal slowdown, but most contacts
felt that it was less pronounced than in previous years. Public
projects remained very strong and expectations for 1998 were very
high among contacts in this segment. One District materials supplier
suggested that this is the highest level of public construction
activity he had seen in years.
Manufacturing
The District's manufacturing sector was very strong and continued
to expand at the end of 1997, but momentum may have been slowing
slightly heading into the new year. Though most contacts noted that
production continued to be near capacity, new orders--previously
described as "strong"--were generally described as "holding up,"
and inventories--which had been "lean"--were being called "okay."
The Midwest's strong construction industry continued to boost sales
of heavy equipment, and construction equipment dealers were reported
to be "crying for more inventory." Strong motor vehicle sales in
December bolstered production for the District's automakers, although
one contact worried that December's strong showing may have borrowed
from January sales. Most producers expected light vehicle sales
to soften slightly in 1998 but to remain near the very good 15 million
unit level. A major producer of high-tech components indicated that
new orders were softer than at this time last year, but that the
company "can live with it." The pricing environment for most manufacturers
remained very soft and raw material costs were either flat or down
in most instances.
The turmoil in Southeast Asia has begun to filter through the manufacturing sector since our last report. Heavy equipment producers appeared to be influenced most directly, with exports to the region falling off noticeably. One producer described the Asian market as "a disaster," as the company's sales to the region were cut nearly in half. The District's automakers expressed some concern that competitors from Southeast Asia would increase the use of incentives in the U.S., though there were few reports of this taking place recently. This would further soften the pricing environment for the industry.
Banking and Finance
Bankers in the District suggested that lending activity remained
very strong as 1997 drew to a close. As was the case in our last
few reports, commercial lending was stronger than consumer lending,
with one large bank noting that loan growth was "outstanding." While
business lending activity normally picks up at the end of the year,
one major bank reported an extraordinary increase in December which
showed no signs of slowing in early January. Other banks noted that
the growth in business loans had tapered off somewhat, but remained
at very high levels. Competition for quality commercial customers
remained very fierce and margins continued to be squeezed. On the
consumer side, the big story was a sharp increase in mortgage refinancing
activity. Falling interest rates lured many homeowners back into
the mortgage market in December and one major bank reported that
refinancing now accounts for over 60 percent of new applications,
up from approximately 30 percent. Overall asset quality was unchanged,
with most contacts describing it as "excellent."
Labor Markets
Labor markets remained very tight through December and early January,
although the steady decrease in the region's unemployment rate appeared
to have ended. The average unemployment rate, which began declining
in mid-1992, flattened out in the latter half of 1997 and may be
trending upward ever so slightly. The major concern of employers,
however, continued to be labor shortages. Though these shortages
were broad-based, information technology and construction workers
were most often cited as being in short supply and accounting professionals
were again hard to find heading into the upcoming tax season. A
major producer of high-tech equipment reported that some projects
had to be scuttled because of the shortage of engineers. Homebuilders'
associations in Wisconsin recently began setting up recruiting booths
at some of the state's "home shows." The shortages continued to
hinder the District's employment growth and most analysts contacted
expect this to continue into 1998. A survey of employers' hiring
plans forecasted that the Midwest's payrolls would continue to expand
in the first quarter of 1998, with Detroit and Milwaukee area employers
being the most optimistic. Wage pressures generally remained subdued,
with new reports of increasing wage gains generally confined to
those occupations where skill levels were upgraded, such as upper-end
administrative staff with project leadership or report writing skills.
Agriculture
Prices for most key Midwest farm commodities have declined considerably
in recent weeks, adding to the likelihood of lower farm sector earnings
in 1998. Sluggish export prospects, compounded by recent problems
in several Asian markets, contributed to the price decline for both
crops and livestock. Livestock prices were further undermined by
a seasonal rise in domestic hog marketings and by a bulge (presumably
temporary) in hogs imported from Canada, where labor strikes curtailed
operations at several packing plants. In addition, recent surveys
confirmed a major buildup in the number of hogs on U.S. farms during
the latter half of 1997, foreshadowing large gains in pork production
for much of this year.