Beige Book Report: Chicago
October 24, 2001
On balance, economic activity in the Seventh District slowed further in September and early October. Reports indicated that the tragic events of September 11 had an immediate negative impact, but many related business disruptions had been alleviated by the weekend. Consumer spending continued to soften, with sales of nondurable goods doing better than sales of most durable goods and services. Residential construction and real estate markets slowed some, but low mortgage rates kept buyers in the market. Commercial real estate markets weakened noticeably, with businesses becoming more uncertain about investment plans. Manufacturing activity continued to slow, and increased business caution further dampened capital expenditures. Lending activity was mixed, with demand for business loans falling and mortgage refinancing surging. Labor demand softened and there were few reports of intensifying upward wage pressures. There were virtually no reports of upward price pressures and several reports of falling transaction prices. Most contacts were satisfied with their current inventory levels. The fall crop harvest was generally progressing well, with good yields reported in the southern and eastern parts of the District, though there were indications of "spotty" and "disappointing" yields in the north and west.
Consumer Spending
Consumer spending was somewhat softer in September and early October,
after temporarily dropping off significantly during the period immediately
after September 11. Contacts noted that by late September and early
October, fundamental economic factors--rising unemployment and falling
stock prices adversely, and low inflation and interest rates positively--affected
retail sales more than terrorist fears. Sales results of discount
stores continued to outperform those of department and specialty
stores, and in some cases the spread widened. One contact reported
that retailers were canceling or delaying orders for the holiday
season. Promotional activity was generally slower, though there
were some reports of small retailers boosting advertisements. In
general, sales of nondurable goods were better than sales of durable
goods, but there were exceptions. While clothing sales were soft,
appliance sales were beginning to see year-over-year gains, excluding
a few days after September 11. District vehicle sales have been
very strong since automakers announced zero percent financing programs
in late September; one dealer reported that 35-50 percent of their
September sales came in the last weekend of the month. Contacts
in the casual dining industry reported that activity in the District
was weak. Spending on services, such as air travel, hotels, auto
repair, and rental cars, generally was weak, though business at
a District movie theatre chain was described as "steady." Contacts
in the air travel industry reported that passenger load factors
were below normal, but up from when air travel initially resumed
in mid-September. One contact at a regional airport indicated that
load factors on flights at smaller airports were in worse shape
than those at larger ones. There were no reports of inflationary
price pressures on the retail level. Most contacts reported that
consumers were increasingly price conscious and there were many
reports of price discounts.
Construction and Real Estate
Real estate and construction activities generally softened notably
in the weeks after September 11. Office vacancy rates continued
to rise in most areas and rents were said to be flat to declining.
Reports of anxiety among occupants of some of Chicago's trophy office
properties became more frequent. According to one contact, "more
than one" tenant of a prominent office tower in the city were looking
to leave the building, for fear of losing workers left skittish
by the World Trade Center attacks. Some tenants noted that workers
in high-rise buildings were less productive because of security
distractions. One hotel operator reported that vacancy rates were
rising and many room bookings had been lost since September 11,
including 30 percent of the company's convention business. Vacancy
rates were also said to be rising on industrial properties in some
areas, and there were scattered reports of light industrial projects
being put on hold. Contacts in commercial real estate reported that
their clients had become decidedly more pessimistic since September
11. Residential activity also slumped immediately after September
11, but picked up later in the month as low mortgage interest rates
kept buyers in the market. One Chicago-area realtor indicated that
traffic through existing homes had picked up to about 85 percent
of early September levels; however, according to other District
contacts, traffic through new models had not picked up to the same
extent. Both realtors and builders noted that demand remained soft
for high-end homes, and may have softened further.
Manufacturing
Activity at District manufacturers continued to weaken in September
and early October, and there was no mention of bottoming as there
had been in our previous Beige Book report. Contacts generally reported
that orders and shipments were down by double-digit percentages
from a year earlier. Reports almost universally indicated that the
events of September 11 had an immediate negative impact, but the
extent and length of that impact varied. Contacts reported some
supply chain disruptions due to increased security at U.S. borders,
but as the problems eased in a few days, none had any plans to increase
inventories to prevent any future potential shortages. In the week
following September 11, nationwide light vehicle sales dropped around
50 percent, but zero percent financing programs by domestic automakers
contributed to a sales surge late in the month that continued into
early October. Contacts were unsure whether the incentives were
only taking sales away from future months, rather than generating
new sales, though one noted, "We are planning for the worst, hoping
for the best." There were some reports of rental car companies reducing
their fleets and orders for new vehicles. Plant shutdowns on September
11 and subsequent delays in receiving parts from Canada and Mexico
led to significantly larger-than-planned vehicle production losses.
Heavy truck sales continued to languish, but it was difficult for
contacts to determine how much the tragedies on September 11 affected
sales. Steel shipments and production were down significantly, with
production declines larger in the Midwest than the rest of the nation.
Orders for machine tools declined and one industry contact noted,
"This is the worst business environment I have seen in my 29-year
career." Shipments of heavy machinery continued to fall, with somewhat
larger declines seen following September 11. Construction equipment
suffered the most, while farm equipment demand was flat and demand
for coal mining equipment was solid. A representative from one equipment
maker in the District lamented that the overwhelming uncertainty
in the current economy was "the enemy of capital spending." Contacts
reported that prices for most manufactured products, materials,
and inputs were down.
Banking and Finance
Overall lending activity was mixed in recent weeks, as uncertainty
about the near-term economic outlook increased. Bankers suggested
that business lending slowed as firms appeared to be putting major
decisions on hold. In addition, reports indicated that some businesses
were weighing future capital spending against increased investment
in security. Loan officers at some banks were reportedly "spending
more time combing through existing accounts than mining for new
business." Commercial loan quality deteriorated further in recent
weeks, but there were no reported changes in standards and terms
for business loans. On the household side, mortgage refinancing
activity surged in recent weeks as homeowners took advantage of
lower interest rates. One banker noted that refinancing activity
was near record levels and would most likely exceed them in coming
weeks. Demand for new mortgages was reportedly mixed, but relatively
strong. One lender stated that "if you have the need, there is no
better time" to take out a mortgage. Credit quality continued to
deteriorate slightly, with delinquencies increasing on many types
of loans, including mortgages and home-equity loans.
Labor Markets
Labor markets softened further after September 11. Year-over-year
increases in initial unemployment insurance claims surged in the
weeks following the attacks. Tourism and travel firms in some larger
metro areas were quick to trim payrolls as business fell off significantly
after September 11. One aircraft engineering firm in the District
has sharply cut back its hiring needs and has begun laying off workers.
Some reports suggested that retailers' fall hiring will be slower
than in recent years as expectations for the holiday shopping season
weakened. At least one national retail chain was already reported
to be shedding workers. Some high-tech services firms continued
to lay off workers and at least one also cut top executives' pay.
There were reports of automakers shedding or considering layoffs
of some white-collar workers in a new attempt to cut costs. A national
survey showed that fourth-quarter hiring plans of Midwest employers
were the lowest since 1994. There were no reports of intensifying
upward pressure on wages.
Agriculture
Soybean and corn harvests were progressing rapidly in District states.
Harvest in the southern and eastern reaches of the District neared
completion. The USDA's October 12 Production Report revised upward
(from September) estimated soybean and corn production in District
states. The soybean harvest was expected to be up more that 4 percent
from last year while corn production was expected to be down about
3-1/2 percent. Some District contacts were surprised by the upward
revisions. They noted that, as expected, the "best crops" were in
the southern and eastern portions of the Corn Belt. However, recorded
yields were dropping off sharply as the harvest moved north and
west. They expected that average yields would fall below the latest
USDA estimates. Most crop prices at the farm gate remained at low
levels--corn slightly above a year ago and soybeans well below a
year ago. Beef and pork prices weakened recently. However, milk
prices were at or near their highest levels in a decade.