Beige Book Report: Chicago
May 3, 1989
Summary
Contacts in the Seventh District indicate that economic expansion is
continuing but is less rapid than earlier. Payroll employment
through February continued to trend upward in the District states
about in line with the nation. Unemployment in the region averaged
5.3 percent of the labor force in February, down nearly to the
national average of 5.1 percent after being higher since 1979.
However, in March unemployment rose in Illinois and Michigan in
contrast with the further national decline. Hiring plans are strong
in the Midwest. Chicago purchasing managers surveyed in March
indicated that expansion of production, orders, and backlogs
continued but was less widespread than last year. This less heated
expansion was reflected in prices paid, which showed widespread
increases but less so than earlier. Milwaukee purchasers' reports
have shown a similar trend over the past year. Higher petroleum
prices are boosting costs for industry, transportation, and
consumers. Contacts with industrial firms in the District have noted
slower increases in orders or shipments for some types of machinery,
paperboard, electronics, and rail transport. Others noted continued
strength in the industries in which they do business, including
industrial chemicals, industrial controls, construction steel, and
heavy trucks. A diversified manufacturer with sales growing more
slowly indicates that the slowdown is confined to U.S. markets, and
that its overseas business is very robust. A minority among our
sources indicated an expectation of an imminent U.S. recession.
Others are cautious, watching closely for signs of weakness. Farm
field work has been slowed by cool spring weather, and there is
concern about dry conditions in part of the District.
Equipment
Reports on equipment markets are diverse, with strength widespread,
but some sectors softening. A producer or various types of machinery
reported that its commercial machinery backlog is well above a year
ago. Major home appliance shipments are at record levels. Demand is
brisk for electrical equipment installed in construction projects.
Industrial markets for electrical controls and related components
are strong though some buyers expect a slowdown in this year's
second half. Sales of equipment to utilities are holding up well
after being very strong late last year. Demand for locomotives has
improved but prospects are viewed very cautiously. Orders for
defense machinery have declined significantly. Weakening was
reported in light construction equipment, reflecting the housing
slowdown. Signs of weakness in markets for material handling
equipment were also noted. Petroleum equipment orders are low.
Construction
Nonresidential construction activity is at a relatively high level
in the Midwest. Construction contracts for nonresidential buildings
last year were at their peak for this expansion in the District
states. Construction activity remains vigorous on office buildings
in Chicago's Loop and on industrial structures. Chicago-area
shopping centers, mostly in the suburbs, are set to open at a record
pace in 1989 and 1990, even though some observers regard the area as
already "overstored." Public works construction is expected to rise
this year.
Residential construction activity is described as still vigorous in the Chicago area. Resales are growing, however, attributed to higher interest rates. Housing prices are up sharply. Mortgage interest rates of 11 percent for fixed-rate loans became more widespread in March. Interest rates on adjustable-rate loans at area lenders climbed considerably in the year to mid-March. Mortgage rates, on average, have edged down since then.
Steel
Steel production in the District, through early April, was above a
year earlier. Orders are also above last year. Demand from machinery
manufacturers reflects the continued growth of capital spending.
Sales of construction steel are particularly strong—"through the
roof," according to one source—at variance with weaker indicators
of the pace of construction nationwide such as contracts. Auto and
appliance markets for steel are holding up well.
Motor Vehicles
After another month of lackluster car sales and inventory
accumulation at dealers, sales perked up in early April following
announcement of enhanced buyer incentives. In addition, assembly
plans for the second quarter were revised downward modestly in the
past month, though they remain near last year's strong pace.
Industry observers speculate that auto makers will stretch out third
quarter model changeover shutdowns to pare inventories, though
components suppliers reportedly are not seeing indications of this.
Truck sales in the first quarter were at a high level but somewhat below 1988's all-time high. Truck production, on the other hand, has been at a record pace. The heavy truck market is strong.
General Merchandise
Reports from retailers in the District were mixed. One noted that
the shift in the timing of Easter, from April 1988 to March this
year, renders questionable both comparisons of the latest month with
a year earlier, and seasonally adjusted sales. Inventories are
regarded as low.
Agriculture
Spring field work in District states is off to a slower start than
in recent years, largely because of cool temperatures. There is
considerable apprehension about the continuing drought conditions in
much or Iowa and western Illinois. Elsewhere in the District, soil
moisture appears adequate for the start of the growing season. In
general, however, precipitation patterns over the next few months
will be more critical to the development of spring-planted crops
than the pattern of the past few months.