Beige Book Report: Chicago
June 23, 1987
Summary
Economic activity continues to expand in the Seventh District, at a
stronger pace than in 1985 and 1986 despite lagging demand for
autos. From December 1986 through April 1987, payroll employment in
District states rose faster than in the U.S. Chicago purchasing
managers reported another month of continued growth in May,
accompanied by further increases in prices and slowing of
deliveries. Sources contacted regarding capital spending in various
industries noted several sizable projects and numerous smaller ones,
some announced earlier and already under construction, others to be
started next year. Signs of improvement are reported in demand for
some types of machinery which had been weak. Slowing auto sales have
led to production cuts and layoffs, particularly affecting southeast
Michigan. Steel continues to show surprising strength, with some
products in short supply and prices rising. A large retail chain
reports a pickup in sales in early June, after a slow May. There are
indications that would-be home buyers are adjusting to higher
mortgage interest rates, though one knowledgeable source sees
continued hesitancy in hopes that rates will fall. Livestock
farmers' earnings have been boosted by higher prices. Allaying
earlier concerns about a lack of precipitation, prospects appear
good for high crop yields per acre in most areas of the District.
Capital Spending
Contacts surveyed recently noted numerous capital investment
projects underway or expected, some not until next year. These
include several auto assembly plants, parts plants, and other
facilities—Japanese, American, and joint venture—being built,
expanded, or improved in District and nearby states. A large steel
mill, a joint venture American-Japanese plant, is to be built in
northern Indiana. Other steelmakers are expected to make sizable
investments in upgrading facilities in the District and elsewhere.
Rehab projects are going ahead at refineries and electric utilities,
including conversion of a Michigan plant from nuclear to gas
expected to start next year. A producer of building and industrial
products expects to increase its capital spending substantially in
1988 and 1989. A furniture maker is building a computer furniture
manufacturing plant in Michigan.
Machinery
Some markets for equipment show an upturn, but reports on current
conditions are mixed. A capital goods producer, bearish in recent
years, sees significant improvement in some lines, including basic
food processing machinery and specialized machinery, but not in
petroleum equipment. On the other hand, a steelmaker reports
improved demand from the petroleum industry, particularly for
offshore drilling, as well as from makers of farm equipment,
construction equipment, and railcars. In contrast, a large farm
equipment producer forecasts retail demand in 1987 below 1986's low
volume. To an unknown but apparently significant extent, strength of
steel demand from these sectors reflects rebuilding of low
inventories and filling of order backlogs built up during prolonged
work stoppages which ended early this year in steel, farm equipment,
and construction equipment.
Motor Vehicles
Auto sales have continued to trail year ago. Automakers have reduced
their forecasts of sales for the year. Production cuts and layoffs,
temporary and indefinite, at assembly and parts plants have been
particularly significant in southeast Michigan. A contact expects
unemployment in the Flint area to rise to around 14% by year-end, as
a result of auto industry cuts and their effects on other
businesses. In contrast, truck sales so far this year have been
above last year's strong pace. An industry source expects production
of heavy trucks to exceed 1986's output by 16% or more, returning to
around the 1985 level.
Steel
Production cuts in the auto industry have not been reflected in
reduced output of sheet steel. Order backlogs, built up because of
the USX work stoppage, have been reduced. Third quarter output of
sheet and other steel products is expected to be unseasonably
strong, partly because of reduced imports, and partly because of
increased usage in some industries. The reduction in imports is
thought to be mainly a result of the lower dollar, rather than
bilateral import restraint agreements. Hot rolled sheet and plate
were reported in short supply. A large amount of structural steel is
under contract or out for bid, part of which is for auto and parts
facilities under construction in this country. Steel prices are up
with further increases expected later in 1987 and into 1988.
Housing
Potential residential mortgage borrowers experienced "sticker shock"
in May after interest rates jumped up sharply, but are said by one
contact to be returning to lenders. Another source, however, thinks
talk that interest rates will decline is causing some potential
homebuyers to wait. Chicago-area lenders typically are quoting 10.5-
10.75% for 30-year fixed-rate loans, with a few as low as 9.9-10%
seeing strong demand. Lenders' cost of funds has risen less than
yields on home loans, resulting in attractive spreads. New home
construction in the Chicago area this year has been above a year
earlier, largely as a result of the mild winter. Home resales have
been active but below excellent levels in 1986. Rental housing units
in certain parts of the Chicago area are in excess supply.
Consumer Spending
A large general merchandise retailer reports that sales were
somewhat slow in May, but have been strong so far in June, helped by
warm weather. Women's apparel has been selling well, despite price
increases resulting from the lower dollar. Credit delinquencies,
concentrated in energy and farm states, have declined after rising
earlier. Inventories are low.
Agriculture
Earnings of District livestock farmers have been buoyed recently by
a large rise in cattle and hog prices. Because of strong earnings,
cattle feeding activities have expanded, particularly in Iowa.
During the first four months of this year, Iowa farmers placed 30%
more cattle in feedlots than a year earlier. Some observers view the
increase as a sign that the long, steep downturn in cattle feeding
in Iowa has ended. Spring crop plantings in District states are
virtually complete, one of the earliest planting seasons on record.
Early stands of corn are rated mostly "good". Rains have tempered
earlier concerns about drought in most District areas.