Beige Book Report: Chicago
December 4, 1991
Summary
The recovery in the Seventh District economy has slowed, with
contacts revealing slowing momentum in auto production and housing
activity. Consumer spending gains remained sluggish, although most
District mail contacts still expect holiday sales to be even with or
slightly above last year. Auto sales remained weak, prompting
further cuts in fourth quarter production schedules. Overall
manufacturing activity generally continued to contribute to relative
strength in the District economy, but smaller increases in orders
and production were recorded by many manufacturers. Housing activity
also softened in recent months. Most large District banks reported
little change in lending standards, while lower borrower demand was
noted by some banks.
Consumer Spending
District consumer spending gains remain sluggish, according to most
contacts, although one large retailer reported significant sales
improvement in early November. Surveys conducted for District state
retailers' associations generally indicated that sales gains are
still expected during the holiday season, but at a somewhat slower
pace than last year. A large discount retailer reported slower sales
in Detroit and Chicago continued to run below year-earlier levels,
in part due to increased competition. A large general merchandise
chain reported improved year-over-year sales in early November, with
increases well distributed across product lines and across regions.
New credit usage at this chain was reported to be above a year ago
for the first time in 1991. This contact also indicated that
inventories remain higher than desired, particularly for some
durable goods.
New car sales remained depressed. A District supplier of financial services to car dealers reported that business at most dealerships has continually slowed in recent months. Floor traffic weakened further and was joined by a new softening in the interest level of potential buyers. Car sales in the Midwest have been hit almost as hard as the national average, according to this contact. One of the largest auto dealers in the District reported that sales have been running at half the rate experienced during the summer and early fall, and stated that his experience was repeated for most dealerships in his market area. Another dealer reported that leasing, as well as sales have softened in recent weeks, noting that "used car sales are keeping us afloat." A dealer of a relatively strong selling model indicated that new business has been softer than projected.
Manufacturing
Purchasing managers surveys supported by contact reports indicate
that manufacturing activity continued to bolster the regional
economy modestly, although momentum slowed in motor vehicle
production. Car and truck assembly schedules continued to be trimmed
in recent weeks. The number of plants idled by domestic automakers
in mid-November was the highest since March. Underlying demand from
consumers remains at recessionary levels, according to this contact.
Heavy-duty truck sales and production remain "very depressed,"
according to an industry consultant, and new softening was reported
in demand from agricultural markets. A parts supplier to truck
manufacturers doesn't see any rebound signals. District producers of
farm and constriction machinery have also been trimming production
schedules recently.
Purchasing manager surveys have been indicating continued expansion by a slimming majority of District manufacturers in the past two months. The overall index produced by the Chicago survey dropped from a seasonally adjusted 56.2 percent in October to 52.7 percent in November. The picture of slowing but continued growth was generally echoed in recent results for Detroit, Indianapolis, and Southwest Michigan, while the October results for Milwaukee showed conditions improving. Reports from individual manufacturers were mixed. A steel manufacturer reported that industry shipments are now expected to decline from the third quarter to the fourth quarter on a seasonally adjusted basis. A manufacturer of electronic connectors stated that the firm continues to cut costs, because the U.S. market remains sluggish. A brighter picture was offered by a large manufacturer of industrial machinery, who reported that domestic orders have begun to show some improvement on a month-to-month basis, after consistently reporting sluggish conditions during the summer and early fall. Several contacts report that exports and sales by foreign subsidiaries continued to outperform domestic sales.
Real Estate/Construction
District housing activity generally softened in recent months,
although some individual markets continued to hold up relatively
well. Recently released state level data show that seasonally
adjusted existing home sales declined in four of the five District
states from the second quarter to the third quarter, although most
of them at a somewhat slower pace than the national average. Sales
in Iowa showed a small increase, and one realtor stated that press
reports of waning optimism in the Midwest "were written by people
who haven't been to Cedar Rapids." Sales in Illinois have softened
since June, but prices are holding, according to the state realtors'
association. Sales in Wisconsin fell slightly, yet remain well above
year-earlier levels, and the states realtor association stated that
sales are still on track for a record year. Statements by individual
realtors generally were consistent with state-level data, although
one large realtor reported the best October in their history, in
large part due to gains in market share. The pace of the recovery in
housing starts in the District has slowed along with new and
existing home sales. A home remodeling association reported that a
seasonal surge in business failed to materialize, with business well
below year-earlier levels. Several reports suggested little change
in the weak commercial real estate market. A supplier of
construction materials used in both residential and commercial
construction in the Chicago metropolitan area reported that
shipments continued to fall in October, and estimated that 1992
shipments will be as much as 25 percent lower than in 1991.
Banking
Credit standards for approving commercial and industrial loans
essentially were unchanged over the past few months. Some of the
respondents reported increased loan rate spreads and/or increased
credit line costs, with increases more frequently reported for large
and medium-sized borrowers than for small firms. At the same time,
borrowing demand was generally reported to be little changed over
recent months, with softer demand from smaller businesses reported
more frequently than from medium-sized or large firms. Where weaker
demand was reported, banks most often cited lower customer needs for
inventory and capital investment. One banker stated that credit
standards consistent with recessionary conditions still hold, but
that when "good prospects" for loans appear, competition has
intensified, with the borrower benefiting from lower loan rates.
Agriculture
Heavy rains in recent weeks slowed the wind-up of the fall harvest
but helped recharge subsoil moisture. Corn and soybean production
estimates for this District, and nationwide, were revised upward
again in November. A better than expected harvest and prospects for
continued weakness in exports have weighed on crop prices this fall.
Corn exports, which declined 27 percent during the year ending with
August, are projected to decline an additional 9 percent during the
current crop marketing year.
Livestock prices have weakened considerably this fall due to evidence of an upturn in red meat production. The expansion now underway among hog farmers in District states and nationwide suggests that per capita pork production in 1991 will be up 7 percent and the largest since 1981. On a more positive note for farm earnings, the distressed conditions among dairy farmers over the past year have eased somewhat as production has leveled-off and milk prices have moved back up above the retreating levels of a year ago.