Beige Book Report: Chicago
March 18, 1998
The Seventh District's economic expansion picked up modestly in January and February, led by increases in consumer spending and housing activity. Some contacts, however, suggested that the unseasonable strength in retailing and housing early in the first quarter may be borrowing from later in the year. Manufacturers continued to operate near capacity and strong new orders showed no signs of softening. Lending activity picked up as many consumers refinanced their existing mortgages. Overall wage pressures remained generally subdued despite very tight labor markets and worker shortages in some occupations and industries. Credit guarantees cushioned any Asian impact on crop exports this winter, but low livestock prices triggered heavy operating losses for many District farmers.
Consumer Spending
Most District retailers were quite satisfied with sales results in
January and February. Sales were generally described as above
expectations and most merchants indicated that this strength was
broad-based. Unseasonably warm weather in the early part of 1998
increased traffic through most stores and greatly boosted sales of
spring items, as well as some other goods. Spring apparel sales were
doing very well with women's lines particularly strong. Some
motorcycle dealers in the region credited the effects of El Nino for
record high sales in January and February, at levels far above their
seasonal averages. Exceptionally strong housing markets boosted the
sales of complimentary items, such as furniture, home decor,
appliances, electronics, and household tools. In addition, the spurt
in mortgage refinancing activity improved consumers' debt positions,
which some merchants credited with increasing sales of household and
home improvement items. Inventories were in good shape, allowing
most retailers to limit their use of promotional activities and
concentrate on profit margins.
Housing and Construction
Overall construction activity picked up moderately in January and
February, led by a sharp rebound in new housing construction. A
healthy economy, low mortgage interest rates, and very mild winter
weather were frequently cited by contacts as factors contributing to
an unseasonably strong new home market. Most builders described
sales as exceptional for this time of the year, with one adding
"if builders aren't selling now, they never will!" The strength
appeared to be broad-based across both geographic and market
segments. Some builders felt that strong sales this early in the
year may lead to a slower-than-normal spring rush. This would not be
entirely unwelcome to builders, given some of the labor shortages
and materials bottlenecks that have occurred periodically over the
last few years. Sales of existing homes continued to surprise on the
upside, with most realtors reporting early 1998 sales results that
were near record levels for this time of year. Broad-based strength
in commercial construction activity was also reported, but contacts
indicated that growth may be slowing in some segments.
Manufacturing
Manufacturing activity remained robust in the District with
virtually every sector running near capacity. Contacts in the heavy
truck industry indicated that demand was high and production was
running "full tilt," with only capacity constraints restraining
stronger growth. The heavy/agricultural equipment and steel
industries experienced similar strength, with orders booked through
the second quarter and plants operating near capacity. One large
steel producer reported having to turn new orders away. Output of
light vehicles remained very healthy in the region amid continued
reports of strong sales. There was some concern that momentum in the
industry was being buoyed by discounting, with one contact noting
that incentives were at levels normally reserved for the end of
the model year. Inventory levels for most manufacturers were in good
shape, although they were slightly low for producers of heavy and
agricultural equipment and slightly high in the auto industry.
Prices for raw materials continued to show very little movement as
did product prices. Steel producers were successful in pushing
through very modest increases, but prices were still below 1994
levels. A producer of supplies to the construction industry also
raised prices, but only expected to reap half the announced
increase. Adverse effects from East Asia's turmoil remained
generally concentrated in the heavy/agricultural equipment sector.
There were no reports of these effects spreading or worsening.
Banking and Finance
Business lending activity was strong throughout the District and the
consumer segment showed signs of gaining momentum. The unseasonably
warm weather and low interest rates boosted housing activity and, as
a result, mortgage originations. The exceptional activity, however,
was in the refinance market. Every banker contacted reported that
refinancing activity was up sharply in January and February, with
one stating that activity was like nothing he's ever seen before.
Reports indicated that personal delinquencies, repayments on credit
cards, and bankruptcies were improving. On the commercial side, loan
activity remained brisk, but loan growth appeared to be slowing.
Overall asset quality was generally described as good, and improving
slightly on the consumer side. Some bankers expressed concern that
fierce competition in the commercial segments may have slightly
eroded asset quality. Continuing a trend noted in our last report,
additional contacts indicated that Asian lenders were withdrawing
from U.S. lending markets as a result of the "Asian Contagion"
turmoil.
Labor Markets
In January and February, conditions in the District's labor markets
changed little from late last year. While unemployment rates
remained very low and shortages persisted in some industries and
occupations, wage pressures were relatively unchanged. Construction
help and information technology workers were most frequently cited
as being in short supply. Entry-level positions continued to be
difficult to fill and one contact indicated that this was due, in
large part, to skill-matching problems. Most businesses indicated
that growth in base salaries remained relatively subdued (with the
exception of occupations in short supply, where wage increases were
more pronounced), while the use of bonuses and other "one-time"
incentives increased. One analyst noted that businesses were
becoming ever more creative in their recruiting efforts, with at
least one firm offering modest weekend trips as an incentive. The
employment component of purchasing managers' surveys from throughout
the District all showed sharp increases from January to February as
well as in year-over-year comparisons. The same trend was evident in
indexes derived from the volume of help-wanted advertising in local
newspapers and quarterly hiring plans surveys. One contact cited
very tight labor markets in Iowa as impeding economic growth in the
state, and a regional manufacturer indicated that increased use of
overtime was cutting into the company's profit margins.
Agriculture
Corn export prospects remain depressed. As of late February, corn
export commitments (shipments-to-date plus outstanding orders) for
shipment in the year ending with August were down one-fourth from a
year ago. Ironically, however, the decline in corn export
commitments to all Asian markets was no worse than that for all
other destinations. Late-February soybean export commitments were
nominally above the year-ago level, but somewhat weaker for Asian
markets than elsewhere. Export credit guarantee programs offered by
the U.S. Department of Agriculture to hard-hit Asian countries
helped sustain new corn and soybean commitments to those markets
during January and February. District livestock farmers experienced
extensive operating losses this winter. Large meat supplies and weak
demand, for both domestic consumption and exports, depressed cattle
and hog prices. The losses for pork producers are likely to continue
for several months.