Beige Book Report: Chicago
May 8, 1996
Summary
Economic activity in the Seventh District remained at
relatively high levels in recent weeks, although a few pockets of
slowing or declining activity existed. Retail sales growth increased
slightly from earlier this year, but results varied by state. The
District's housing activity picked up in March and April, with
several contacts seeing buyers motivated by concern of possible
further mortgage interest rate increases. With some exceptions,
manufacturers were reporting increases in overall activity. Bank
lending activity remained at high levels, and some banks even
reported strong loan growth. Labor market shortages continued to be
the main concern of businesses, despite softening demand for workers
from the manufacturing sector. Grain prices increased sharply in
recent weeks due to a combination of strong demand, both here and
abroad, and weather-related problems which threaten to exacerbate
already tight supplies.
Retail sales
Retail sales improved slightly in March, with further
sales increases reported through much of April. Several retailers
stated that Midwest sales were above year-ago levels and slightly
ahead of gains in other regions. However, unseasonably cold weather
may have hindered sales growth of spring merchandise, particularly
in Michigan. Several retailers were concerned that sales lost to
poor weather may not be made up in coming months, although one
retailer reported a seasonal buildup of inventory in anticipation of
increasing sales in May and June. While a survey of small
independent Michigan retailers showed that sales continued to be
slow in March, most respondents were optimistic that pent-up demand
will boost second quarter sales, especially when warm weather
settles in. Several auto dealerships reported that sales over the
last several weeks were somewhat sluggish for this time of year,
mostly due to a reduction in fleet sales. However, dealers are
expecting marked improvement in the months ahead and dealer
confidence remains high. One regional distributor of foreign cars
reported that their new- and used-car sales were doing very well and
dealers were "screaming" for more stock.
Manufacturing Activity
Manufacturing activity continued to expand
at a moderate pace in March and early April, despite declines in
some key industries. Recent purchasing managers' surveys from around
the District were generally indicating flat-to-moderately increasing
activity, including the survey from one major metropolitan area that
had been signaling a contraction in overall activity in its two
previous reports. Most durable-goods producers were upbeat,
reporting recent orders or sales to be slightly stronger than they
were expecting at the beginning of the year. Several pointed to
exports as a key source of strength. A supplier of specialized
equipment to the mining and paper industries reported strong demand
for new equipment. machine tool producer reported a modest slowdown
in demand for small- and medium-sized metal-cutting machines, but
total demand was boosted by orders from the auto industry. A steel
analyst stated that integrated mills supplying the auto and
appliance industries had full order books through the second quarter
and demand for structural steel continued to rise. Mills had been
running behind on filling orders from the auto industry and were
able to use the recent strike-related disruptions to catch up. Most
producers reported that inventories were lean or, at worst, slightly
above plan and would only increase, if necessary, to keep in line
with any sales gains. However, some seasonal inventory building was
taking place to prepare for summer plant closings. The pricing
environment continues to be described as "tough." However, a March
survey of businesses around the nation indicated that firms in the
Midwest were more likely to be experiencing increases in prices paid
and prices charged than in other regions.
A few industries reported declining activity. A producer of heavy construction equipment experienced weaker-than-expected orders in recent months and reported that production had been cut to levels below the end of last year. An analyst for the heavy-duty truck industry reported rising dealer inventories and cuts in build plans, although the industry is postponing major adjustments until the summer shutdown period due to better-than-expected gross new orders. Auto assemblies in the District declined sharply in March due to a strike against a major automaker, but few businesses reported being impacted by the strike unless they were a direct supplier to the plants affected. Auto production bounced back in April as strike- related plants reopened and efforts were made to recapture some of the lost production.
Banking Conditions
Most bankers reported stronger-than-expected
loan demand, with growth rates generally described as moderating
from earlier months but still strong. Commercial and industrial
lending was strongest among mid- and small-sized businesses, with
one bank economist attributing some of the strength to recent merger
and acquisition activity among local businesses. A large regional
bank detected less pessimism among corporate borrowers than was
prevalent at the beginning of the year, and one bank noted a decline
in C&I loans for inventory financing. However, several banks noted
some slowing in consumer lending. Every bank contacted reported that
mortgage applications were down sharply in recent weeks, mostly for
refinancing. Most banks viewed credit quality (excluding retailer
loans) as remaining unchanged at very good levels, despite some
increase in delinquency rates.
Labor markets
Labor markets remained much tighter in the District
than in the nation as a whole; with unemployment rates well below
the national average. Temporary help agencies reported that a
shortage of qualified workers in the technology and information
industries persists throughout the District and demand for skilled
clerical workers is very strong. The employment component of
purchasing managers surveys in March and April were mixed,
supporting other reports of a stagnant employment situation in the
manufacturing sectors. However, several sources reported that there
are signs, including increases in average weekly hours, that
manufacturers will again be increasing employment soon. Most sources
also indicate that there is very little upward pressure on wages.
Agriculture
Grain prices have soared recently, setting new highs in
both the cash and futures markets. The latest surge reflects strong
domestic and foreign demand for corn, as well as a realization that
the winter wheat crop suffered extensive damage from weather related
problems during the fall and winter months. Higher grain prices are
a major concern for livestock producers, although the District's
pork producers have fared reasonably well so far. In addition, some
observers question whether the depleted grain stocks might result in
pipeline disruptions to feed supplies prior to the new harvest crop.
An extended period of high grain prices may trigger cuts in
livestock production which would, in time, tighten supplies of meat,
milk, and eggs. However, the high prices will likely add to the
large increase already expected in spring crop plantings now
underway in the Midwest. Increased grain prices are, in part,
responsible for rising farmland values. Our latest survey showed
that District farmland values increased by over 4 percent in the
first quarter and are now 10 percent higher than a year ago.