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Federal Reserve Districts

Seventh District - Chicago

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The Seventh District economy remained quite strong in June and July, though growth was hampered by strikes against General Motors Corporation. The strikes led to the company shutting down nearly all of its operations in the region, idling tens of thousands of workers. However, most contacts outside the auto industry reported very limited effects from the strikes. Consumer spending picked up in July after slower-than-expected sales results in June. Exceptional strength in the construction industry was rippling through virtually every segment of the economy. Consumers were buying home furnishings and appliances to stock their new homes and the region's steel and construction equipment producers were running near capacity. Lending activity remained brisk in June and July, in large part due to very strong home sales. Labor markets remained much tighter in the District than for the nation as a whole, despite the heavy concentration of GM and its suppliers in the region. Hog prices dropped below the break-even point for many pork producers and grain prices were pushed downward by the prospect of a large fall harvest.

Consumer Spending
Overall retail sales in July were in line with industry expectations after slower-than-expected June sales results. Reports by individual merchants were mixed, however, because some retailers were not adequately stocked to meet the demand for air conditioners, fans, etc., due to warmer-than-expected weather. Women's and children's apparel were most often cited as selling very well while sales of fall merchandise got off to a slow start. Strong home sales continued to boost sales of complementary items, such as furniture, electronics, lawn and garden, appliances, and home improvement items. There were no reports of unwanted inventory accumulation and promotional activities were virtually unchanged from the same period last year. For most of the District's retailers, there has been little or no effect so far from the auto strikes. One national department store chain reported that, in contrast to sales gains elsewhere, sales were down markedly in the immediate area of the strikes (Flint and surrounding areas); and some restaurants/lounges and convenience stores in that area were also negatively impacted. Sales of new light vehicles at GM dealerships were down considerably due to a lack of inventory, and parts shortages resulting from the strikes were beginning to hamper their service business. Light vehicle sales remained strong for the region's other automakers, despite a slight pullback in the use of incentives. On average, the industry's level of incentive spending decreased recently although the pullback was tempered by the competing goal of increasing market share. Automakers were concentrating on increasing market share through fleet sales. The shortage of new vehicles has been driving up prices on some used GM vehicles.

Housing and Construction
Overall construction activity remained very robust in June and July, the impact of which has rippled through the rest of the economy. Strength in existing home sales continued to surprise some realtors, with year-over-year unit sales growth in the double digits. Sales of new homes did not fare as well. Though still strong, builders across the District indicated that new home sales had softened somewhat in June and July. Several contacts suggested that the exceptional sales pace early in the year may have borrowed some from June and July sales. However, there were no reports of unexpected inventory buildup or increased use of incentives to move new housing units. As in our last report, business construction remained very robust with the exceptional strength making it very difficult to find construction workers in many markets. The overall strength in housing and construction activity could be felt in virtually every economic sector from consumer spending to the region's manufacturing sector--where producers of construction equipment, steel, and building materials were all running near capacity.

Manufacturing activity remained very high in the District, although overall growth was slowed by the auto strikes in June and July. Production of light vehicles in the District dipped expectedly, but the slowdown was due entirely to the auto strikes. Other automakers reported continued high levels of production, with light vehicle sales remaining strong and inventories in good shape on fast selling models, but slightly high for some of the slower selling lines. The auto strikes curtailed production at some of the region's steel factories. Due to "just in time" inventory control, suppliers of steel to GM had a strong incentive to cut production immediately, but one contact indicated that those suppliers will quickly resume normal production once the strikes are settled. Steel prices decreased slightly as inventories built up due to the strikes and as imports from Asia accelerated. Producers of construction equipment and heavy trucks continued to run at or near capacity with strong demand and desirable to slightly lean inventory levels. Demand for agricultural equipment softened noticeably as a result of declining food commodity prices. In addition, another of the region's manufacturing industries (paper) was reporting adverse effects from the economic malaise in Asia.

Banking and Finance
Lending activity generally slowed in June and July though growth remained positive and "acceptable." The commercial lending market was described by one banker as "hot as a pistol." Lenders in Michigan and Indiana expressed concern that prolonged auto strikes could erode asset quality on loans to some of the automaker's suppliers. Only a small percentage of suppliers to the industry are exclusive to GM, however, and to date there were no reports of asset deterioration resulting from the strikes. Competition in the commercial real estate segment was leading to a few deals that left some analysts "scratching their heads." Strong sales of new and existing homes continued to bolster the consumer side of lending. Though largely past the recent boom, refinancing activity remained robust and one contact indicated that another 10-15 basis point drop in the rate on 30-year fixed rate mortgages could lead to another wave of refinancing activity. Competition continued to squeeze margins, but increased fee income--especially mortgage underwriting fees--was boosting profits. Many bankers indicated that strong earnings are being used to shore up loan loss reserves, limiting their exposure in the event of an economic downturn. Overall asset quality remained very good according to most contacts.

Labor Markets
Labor markets in the District remained tighter than for the nation as a whole, despite the labor strife at GM. The region's unemployment rate was nearly a full percentage point below the national average in June, and labor markets showed few signs of developing slack in July. Some auto suppliers and dealers were reluctant to lay off workers, despite the strike-related slowdown, for fear of losing them to other employers. A District trucking and warehousing firm reported continued difficulty in finding and retaining quality drivers. A staffing services contact in central Indiana indicated that the firm had more applicants and fewer permanent hire orders from mid-June to late July. This contact suggested that these developments, and several requests by previous applicants to re-open their files, indicated some softening of demand for labor in the area. Contacts most frequently cited information technology and construction workers as being in short supply. There were no new reports of intensifying general wage pressures, with District employers preferring to use targeted wage increases and one-time bonuses to attract and retain workers.

For many hog producers, hog prices have fallen below break-even levels as a result of weaker-than-expected exports to Asian markets, increased output, and large competing supplies of beef and chicken. In contrast, strong demand for milkfat-based products, such as butter and ice cream, firmed up milk prices for dairy farmers. Much of the critical pollination period for corn occurred in July (rather than August) due to the early spring planting. Generally favorable weather conditions and a lack of any serious problems contributed to a decline in cash and futures prices for both corn and soybeans. The well-being of the corn and soybean crop is somewhat variable, with conditions relatively better in Iowa and Wisconsin than other District states.

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Last update: August 5, 1998