Beige Book Report: Chicago
June 19, 1996
Summary
The Seventh District economy expanded at a slightly higher
rate in May and early June than earlier in the year, led by a
moderately expanding manufacturing sector. Retail sales continued to
improve through April and May, while inclement weather dampened the
sale of seasonal items and delayed many housing and construction
projects in the District. Manufacturing activity continued to post
modest gains in May, led by increased orders and production. Banking
activity remained strong in most categories, although margins
continued to be squeezed by competition for loans. Labor markets
remained tight, manufacturers were increasing their payrolls, and
spot shortages of qualified workers persisted. Grain prices
retreated from record levels, but District farmers remained well
behind in their plantings.
Retail sales
Retail sales in the District continued to improve
through April and May and were up slightly in year-over-year
comparisons. Several large retailers reported that sales growth in
the Midwest was slightly below their national average. Most
retailers reported that sales could have been better, but inclement
weather hampered the sale of seasonal goods. Most contacts reported
that inventories were in line with target levels for the coming
Father's Day and summer sales events. The retail environment
continued to be very competitive and a survey of small retailers in
Michigan suggested that sales gains resulted from increasing
promotional efforts. Auto dealers and distributors in the District
reported that sales were very strong in May. One dealer reported
that showroom traffic was up, model availability was adequate, and
expectations remained high. Analysts at a June auto conference in
the District reported raising their sales forecasts for the second
half of 1996, although sales are not expected to continue at the
strong pace set in the first half.
Housing/construction
Housing and construction activity slowed
moderately in May and early June, but District sources attribute the
bulk of this slowdown to inclement weather. New home sales increased
slightly in April, but a survey of homebuilders suggested that sales
in the Midwest were off moderately in May. Conversations with
builders across the District confirm a May downturn, but one builder
stated that the downturn was "75% weather, 25% (the recent rise in
mortgage) interest rates." Realtors also reported a weather-related
slowdown in traffic through existing homes in May. However, most
builders and realtors contacted believe that the market is still
very strong. In addition, the national survey showed that Midwest
builders were the most optimistic for the coming six months,
although the rise in mortgage interest rates had dampened their
optimism slightly. Lumber and cement dealers in the District
reported a slowdown in shipments in May, but also noted that
shipments picked up in early June. These dealers believe that most
construction has been delayed due to inclement weather--not
canceled--and have raised their expectations for the third quarter.
Manufacturing
Overall manufacturing activity in the District
increased modestly in May and early June, while scattered pockets of
softness persisted from earlier in the year. Purchasing managers'
surveys from around the District continued to indicate solid gains
in new orders and production, although backlogs continued to
contract. Inventories varied from reports of accumulations in
Michigan, some of which were intended, to liquidations in Wisconsin.
The surveys were mixed with regard to prices paid, with declines
reported in Michigan and increases reported in Wisconsin (primarily
for commodities such as copper, aluminum, and fuel). An appliance
industry analyst reported record high appliance shipments to dealers
in April and shipments continued to indicate strength through May.
However, some unplanned inventory building was also occurring.
Several steel producers reported that order books were full through
the third quarter, although competition from new capacity coming on
stream over the next several months was restraining price increases.
A diversified producer of specialized machinery, including material
handling equipment, noted that orders were up in May and were well
up year-to-date. Analysts cited continued softness in the heavy
construction and heavy-duty truck industries, but in both cases,
orders through May were slightly better than the industry had
expected earlier in the year.
Banking
Reports from District bankers continued to be upbeat,
although competition was widely described as being intense. Most
contacts reported that consumer lending activity continued to be
strong, with one bank reporting some pickup in loans for the
financing of new car leases. Although home refinancing activity
virtually stopped in recent weeks, new originations remained fairly
strong. One banker noted that loan demand for low-end housing was
doing much better than for luxury homes. C&I lending continued at a
high level in May, with some contacts reporting continued solid
growth while others noted a decline from the peak levels reached in
late 1995. While credit quality remained generally high and
delinquencies remained low in recent weeks, one banker expressed
concern over the increase in local bankruptcies, especially among
older businesses (including several retailers). Despite the high
lending volume, bankers generally reported downward pressure on
margins, with new banks moving into local markets and customers
becoming more selective in their choice of banks.
Labor markets
Employment remained at record levels for the District
through May and early June and spot labor shortages continued. A
national survey of employers reported that Midwest employers
continued to have the most optimistic hiring plans of any region
heading into the third quarter, led by expected strength in the
manufacturing and construction industries. Manufacturing employment
rebounded in April after two months of slight decline, and
purchasing managers' surveys from around the District suggested that
moderate growth in manufacturing payrolls had continued through May.
Construction employment increased seasonally despite adverse weather
conditions across much of the District which hindered the progress
of many projects. Several sources reported that shortages of
qualified workers persisted in most major markets, but may be easing
somewhat due to a summer influx of students into the temporary labor
force. Increases in the starting wage of entry-level workers over
the last year seem to have tapered off. However, several contacts
reported that most employers were willing to pay slightly more to
keep good employees. Temporary help agencies reported a shift from
temporary to temp-to-permanent assignments, suggesting employer
optimism about continued strength in the economy.
Agriculture
Cash and futures grain prices recently moved lower from
record highs as export demand waned and favorable weather conditions
improved prospects for the wheat harvest and allowed farmers to make
progress in planting corn and soybeans. However, prices remained
well above year-earlier levels. Despite recent progress, the pace of
crop plantings continued to lag in District states. Corn planting in
Indiana and Michigan was significantly delayed and progress in
soybean planting was also running behind the normal pace in all
District states. In contrast, corn planting in Iowa was nearing
completion. Many planted cornfields were plagued by cool
temperatures and excessive rainfall, leading to low surviving plant
populations and forcing farmers to consider the added expense and
uncertainty of replanting.