Chicago: January 1996

January 17, 1996

Summary
The Seventh District's economy expanded at a modest pace through December, continuing a pattern of slowing economic growth in recent months. Most retailers reported a "disappointing" holiday season despite a surge in consumer spending toward the end of December. Harsh weather in December slowed real estate transactions, but District sources maintain that the market remains strong and are very optimistic for the new year. Despite weakness in auto-related industries, overall manufacturing activity rebounded slightly after slowing in October and November. Banking contacts suggested that December's consumer and business loans continued to grow but at a slower pace than in November. Labor markets remained tight throughout the District with few signs of softening.

Retail sales
Despite retail sales showing improvement throughout December, a majority of District contacts reported that sales were below their expectations. Competition continued to be quite intense, and aggressive promotional activity and price reductions were needed to boost sales. Mall sales in particular appeared to do better than other types of retailing, with "one-stop shopping" being cited as a primary reason for increased sales this year. One general manager of a suburban mail reported double-digit sales growth (year-over-year), although these results were viewed as much higher than other mails in the area. Several retail contacts stated that sales results regionally were roughly comparable with national results. However, one major retail chain reported that sales gains in the Midwest region were above the store-wide average, noting that bad weather in early December actually boosted auto parts-related sales. Overall inventories for this retailer were viewed as within plan at year- end. A mail-order merchandiser also reported inventories at satisfactory levels. However, a District banker expressed concern that some of their retail customers were carrying heavier-than- planned inventories.

Housing/Construction
The housing market remained strong through the fourth quarter and first week of January despite severe winter weather. Both new and existing home sales experienced a normal seasonal slowdown from November to December. Existing home sales were stronger than expected in November, but several realtors in the District noted an extraordinary number of cancellations of showings in December due to the weather. However, they also reported that buyers were back out in force in early January. All realtors contacted reported that buyers outnumber sellers in their markets and one realtor expressed concern of losing buyers because "the right home isn't on the market." A December survey of homebuilders suggested continued strength in the District's new home market as well as continued optimism for the next six months. Commercial activity was strong in December and early January, according to several District sources, with notable strength on the industrial side. Moreover, December's office vacancy rates in most metropolitan areas fell in year-over-year comparisons.

Manufacturing
Manufacturing facilities generally continued operating at high levels over the last six to eight weeks, but weakening activity was noticeable in auto-related industries. The Chicago, Detroit, and Milwaukee purchasing managers surveys for December all indicated expanding orders and production. However, the auto component of Detroit's survey and purchasing managers surveys for western Michigan showed contracting activity. An energy supplier to southern Michigan reported a decline in year-over-year sales to industrial customers, mainly auto-based companies. Several auto suppliers reported that order intake rates for December were flat to down from the previous month, after accounting for normal seasonal variations. However, a diversified producer of capital goods in the District stated that orders increased in most of their market segments, with the exception of material handling. A steel producer reported that order rates at integrated mills were coming in quite strong, mostly for structural steel. Several steel producers attribute the recent pickup in demand to steel service centers restocking their inventories. New mini-mill capacity expected in the first quarter of 1996 may take market share away from both imports and integrated mills. Moreover, recently announced price increases for sheet steel are not expected to hold once the new mini-mill capacity is available.

Banking
Contacts around the District reported that lending activity finished the year strong, but several bankers noted a distinct slowdown in the last six weeks. On the consumer side, mortgage lending remained at high levels and most sources reported a sharp increase in refinancing activity in December. While overall levels remained quite low by most standards, one banker cited an increase in consumer delinquencies and bankruptcies. Business loan demand remained generally strong but growth appeared to be leveling off. A widely cited source of softening loan demand was auto-related industries. However, several major regional banks reported accelerating lending activity in those areas of the District with strong local economies. Bank contacts noted that virtually all industrial lending was for new investment with little evidence of an increase in inventory financing.

Labor markets
Labor markets remained tight through December although some ebbing of demand for retail and auto-related workers was evident. The greatest concern of most contacts continued to be labor shortages. Several placement specialists report that unfilled orders for both permanent and temporary help remained extraordinarily high in the fourth quarter, with shortages broad- based across occupations and industries. A regional manager of a fast-food restaurant chain reported that labor shortages remain prevalent and that wage-related margin pressures were just starting to lead to higher consumer prices. Auto-related and retail trade industries showed some signs of softening demand for labor, but this softening is confined to a few metropolitan areas and market segments. The employment component of purchasing managers surveys around the District suggested modest softening in the demand for manufacturing workers in December, but the index numbers are consistent with steady employment levels.