Beige Book Report: Chicago
December 1, 1987
Summary
Business activity continues to expand in the District with few signs
of significant effects on aggregate activity from the stock market
crash. Employment has been trending upward. Apart from autos,
industrial activity generally is rising. Nonauto consumer spending
appears to be holding up well, overall, though reports are mixed.
Capital spending is expanding in a number of industries. Sales of
basic industrial supplies have strengthened. Machine tool orders
have picked up recently. Lead times have lengthened considerably,
and prices of industrial materials and intermediate products
continued to press upward after the stock market crash. Building
contracts in District states have risen this year, in contrast with
a decline in the nation. District farmland values rose for the third
consecutive quarter in the July-September period.
Effects of the Stock Price Drop
Reports from District contacts indicate that effects of the stock
price drop, so far, are limited. Some retailers saw a slowdown in
sales beginning October 19, but only for a couple of days. A few
real estate transactions were cancelled shortly after October 19,
and inquiries about selling homes rose from some worried
participants in Chicago's financial exchanges (though few appear to
have listed their homes as a result). The possibility was noted by
our sources that sizable cuts in consumer or capital spending could
still take place, leading to inventory adjustments and a more
general slowing of activity, but they see no evidence that this is
occurring. A contact at a large retailer, who has seen no sustained
adverse effects on the firm's sales, suggests that, contrary to the
recent trend to lower forecasts, projections for activity should be
raised in view of the fall in interest rates and the dollar since
October 19, and ample liquidity.
Purchasing Managers
Chicago-area purchasing managers reported that orders, backlogs, and
production continued strong in October. Vendor delivery times
lengthened, and price increases were widespread. Milwaukee
purchasing managers indicated that lead times have lengthened
considerably, resulting in a slower rate of rise in production and
drawdowns of inventories of some materials. Orders and backlogs
continue to increase. The lower dollar has sharply boosted exports.
Buyers are concerned about the threat of higher inflation at the
finished goods level from continued increases in prices of basic
industrial inputs "across the board." Firms are still cautious about
capital spending commitments.
Capital Spending
One source describes metals producers as on a "capital spending
spree" for process improvement. Their more efficient plants are
operating at or near capacity. Glass and paper makers are also
investing in new equipment, and some cement makers are building new
plants. Japanese motor vehicle and parts manufacturers are investing
in numerous plants in the U.S., and additional spending is thought
likely due to the dollar's further fall over the past month. There
are no signs that the fall in stock prices is leading to delays or
cutbacks in capital spending projects already underway.
Construction and Real Estate
Residential real estate sales are slow, and few loan applications
are "in the pipeline." Rates quoted in the Chicago area for 30-year
fixed-rate home mortgage loans have fallen from around 12 percent a
month ago to 10.5 percent, with a few lenders at 10.25 percent. Loan
applications are typically low at this time of year, but may also be
held down in part by hopes that rates will fall further or by
households' responses to the drop in stock prices. In contrast, a
commercial mortgage banker reports that applications increased
following the recent drop in mortgage interest rates; lower rates
are viewed as a window of opportunity for refinancings and new
projects. Residential construction contracts (in square feet of
floor space) in the first nine months of 1987 were up 8 percent from
last year in District states, compared to down 8 percent in the
nation. Year-to-date mobile home production in District states
(mainly Indiana) was 2 percent above last year, in contrast with 5
percent lower for the U.S. Contracts for nonresidential buildings
were 14 percent higher in the District and flat in the U.S. A large
Chicago-area supplier of ready-mix concrete expects shipments in
1988 to be at a good level but less than this year, mainly
reflecting cuts in office buildings and other commercial structures.
Numerous projects are in the planning stage. Public works and
highway construction will be strong in 1988.
Motor Vehicles
Slow car sales are leading to further production cuts. Three
Michigan assembly plants will be shutdown for 1-3 weeks in January
with two of these plants then reopening at reduced line speeds. In
part, the auto production cuts reflect the shift in consumer
preferences toward small trucks, including vans, and the continued
strength of imported cars—both truck and imported car sales in
October were highest ever for the month. Sources in Michigan remain
concerned that announced auto production plans are too optimistic
and that further cuts will be needed, adversely affecting suppliers
and communities in that area.
Other Manufacturing
A diversified maker of consumer and industrial products reported
that sales remained strong in October, with no weakening in any of
its lines. Steel production at Chicago and Detroit area mills has
continued to rise in recent weeks. Demand is relatively strong for
gypsum board and cement in District states. Gypsum board pricing may
have stabilized after a drop earlier this year.
Consumer Spending
Recent cool weather has boosted sales of apparel. In the view of one
retailer, the outlook is favorable for Christmas. Inventories of
nonauto consumer durables and many non-durables are low and unlikely
to pose problems for merchants. However, sharp increases in prices
on imported women's apparel have led to cuts in consumer spending
and extra promotional efforts by retailers to sell excess
inventories.
Agriculture
Our latest survey of agricultural banks indicated that District
farmland values, on average, rose more than 3 percent in the third
quarter, the third consecutive quarterly rise since the downtrend
ended in late 1986. Among District states, the third quarter trend
in farmland values ranged from no change in Michigan to a rise of
nearly 5.5 percent in Iowa. A large proportion of the surveyed
bankers noted that demand to acquire farmland is up from a year ago,
both among farmers and nonfarmer investors. However, there has been
no apparent pickup in foreign investor interest in U.S. farmland.