Beige Book Report: Chicago
March 15, 1989
Summary
Economic activity continues to rise in the Seventh District,
according to recent reports. Total employment increased in January,
partly reflecting unusually mild weather which allowed construction
work to proceed at a high rate. Contacts with firms in various
industries in the District indicate that sales and production
continued to expand in January and February. Car sales have slowed
and inventories have built up, leading to limited production cuts.
Truck sales have stayed near last year's pace. General merchandise
sales in January and February continued to grow. Steel production
this year has been above the year-earlier pace, with demand
supported by strength in equipment investment and a high level of
steel usage in industrial and other construction. Residential
building appears likely to slow in 1989. District farmland values
continued to recover through the end of 1988. Farm equipment sales
in the District fell last year, but a large increase is expected in
1989.
Motor Vehicles
Deliveries of new cars slowed in January and February, following
stronger sales in December, and dealer inventories rose. Domestic
car manufacturers have enhanced sales incentives. Production
schedules remain strong, but output has been pared at some
facilities including a Michigan compact car assembly plant. Other
plants have slated startups of second shifts. Truck sales in January
were highest ever for the month, in contrast with the softness in
autos, but sales slipped somewhat in February. Domestic truck
production set records in January and probably also in February.
Steel
Output of steel this year is expected to remain at a high level. Raw
steel production in the District continued above last year in
January and the first half of February, after increasing about 9
percent in 1988. Favorable prospects for steel reflect strength in
producers' durable equipment markets and vigorous demand for
construction steel, offset by an anticipated mild slowdown in motor
vehicles. Exports of steel have risen sharply, from a low base, and
imports have fallen. Raw steel production capacity is expected to
increase this year, after seven consecutive years of decline.
Equipment
Near-term capital spending prospects are for continued fairly broad-
based increases, particularly for machinery, though the rate of rise
in investment is likely to be less rapid than in 1988. Many
investment projects started in 1988 will continue in 1989,
supporting a high level of spending. Capacity expansion projects in
papermaking and other chemical process industries emphasize
"debottlenecking." Machine tool orders have risen strongly.
Backlogged orders for railcars nearly tripled in the latest year,
from a low level. A railcar plant idled for 6 years and a barge
builder closed for 3 years are resuming output in District states.
Another of numerous Japanese-owned auto components plants was
recently announced for Michigan. Competition from these plants is
holding down wages at older components producers. A Chicago-area
maker of TV picture tubes has increased production and employment in
response to shortages. Types of machinery investment expected to
show weakness include small earth-moving equipment, reflecting the
housing market slowdown. A maker of small gasoline engines recently
announced layoffs partly in response to last summer's drought which
reduced lawn mower replacement and repair needs. A worldwide
shortage of compressors was cited in the planned shutdown of an
Indiana refrigerator manufacturing plant.
Construction
Construction slowed in February after unusually mild weather in
January boosted activity. Contracts for construction of buildings in
District states have not shown the weakness evident over the past 2
to 3 years in national figures. Nonresidential building contracts in
1980, in square feet of floor space, were about even with 1987 in
the District states, at the highest level of the current business
expansion. Industrial construction is relatively strong in the
Midwest, including plants being built to supply new motor vehicle
assembly plants of Japanese manufacturers. Industrial building has
been strong in northeast Indiana, tied to a new truck plant opened
there in 1986. Rental and absorption rates have been rising for
Chicago area warehouse and distribution space, including industrial
buildings in Northwest Indiana, which had been depressed.
Construction steel backlogs are described as the highest in years,
and numerous projects are in the design and engineering phases.
However, many firms continue to emphasize equipment investment,
making more efficient use of existing space. Just-in-time inventory
programs have cut the amount of factory space needed at these
plants.
Residential building has slowed, but mainly apartments. Construction of homes remains at a fairly high pace. Residential building contracts in District state' last year were 4 percent below 1987, when they reached a high for the 1980s. Mortgage interest rates have risen, with quotes on Chicago area thirty year fixed-rate loans averaging 10.7 percent in the latest week and initial rates on adjustables averaging 8.6 percent. Higher interest rates are expected to dampen residential construction activity in 1989.
Retailing
A sample of general merchandise retailers in the Chicago area
reported same-store sales in February ranging from about even with a
year ago to double digit gains. Illinois retailers noted a 5 percent
increase in sales during the fiscal year just ended, with larger
year-to year gains during the holiday season. A large retailer
expects nondurable goods sales to pick up during the rest of 1989.
The share of purchases on credit has been trending upward.
Agriculture
District farmland values, on average, rose about 3 percent in the
fourth quarter and nearly 12 percent during all of 1988, the second
consecutive year of firming following a precipitous, five-year
decline. Land values are up about a fifth from the 1986 low but
still a third below the 1981 peak.
Unit retail sales of farm tractors and combines in District states fell 4 percent last year, the ninth consecutive annual decline. Nationwide, tractor and combine sales rose nearly 5 percent, despite a marked drought-related slowdown in the second half. Initial reports show January sales below a year ago. However, analysts expect a sizable rise (10 to 20 percent) in sales for all of 1989.