August 7, 1991
Summary
The Seventh District economy generally remained on a modestly
expanding path in June and early July. District consumer spending
appears to have risen slightly over this period, according to
several contacts. On balance, District manufacturing activity
strengthened in June, and the recovery in the auto sector continued.
However, several contacts reported that the capital goods sector
remained weak. Drought-like conditions have placed stress on
potential District crop yields. Bank credit growth in the District
was restrained by both demand and supply factors, and commercial
real estate portfolios continued to weigh on bank capital positions.
Consumer Spending
Consumer spending gains in the District were sluggish in June and
early July. A recent survey of retailers in Illinois and Michigan
indicated that June sales were about equal with last year, in
contrast to a decline nationally. Earlier-than-expected growth in
sales of seasonal merchandise helped generate a good national retail
sales report in May, but was followed by some softening in June,
according to one District contact. Sales were not simply shifted to
the earlier month; however, as many retailers found themselves low
on stocks of items that remained in demand through June. Several
appliance retailers in the Illinois state capital reported that
year-over-year sales gains resumed after state workers began
receiving paychecks, which had been suspended during recent budget
negotiations. The Wisconsin vacation season is going very well, but
low occupancy rates and heavy discounting continue to depress the
Detroit hotel industry.
Autos
National reports showing car sales rising from low levels in March
and April were joined by increasingly optimistic reports from
several District auto dealers. The slippage in auto sales reported
for mid-July may have been due in part to a heat wave that made
shopping unattractive, according to several dealers. An industry
economist noted that sales were buttressed by fleet purchases in
June and should have been expected to ease somewhat, but auto sales
in the second half of 1991 are still expected to be better than in
the first half. Several dealers located in stable markets reported
that sales have begun to show a steady rebound. Dealers located in
less stable or more diverse markets reported that sales remain
sluggish, in part due to stricter financing conditions. A
distributor of transplant autos reported good sales growth in the
Midwest in June and early July, and market share gains in the
District continue. Several contacts indicated a growing importance
of need-based buyers in the sales mix. Fewer buyers are "reaching
up" to more expensive models.
Manufacturing
The balance of momentum in District manufacturing activity shifted
toward expansion in recent months, after lagging other sectors of
the region's economy. Purchasing managers' surveys around the
District continued to show improvement. In July, the Chicago index
registered net expansion for the first time since last August,
although new orders was the only component to register over 50
percent. Slower employment cutbacks also contributed to the rise in
the overall index. Still, the trend in the overall Chicago index has
been unambiguously positive since a January low. Sharper improvement
was recorded in June by two surveys in Michigan. The Detroit index
for June registered what the survey director described as "the first
full-fledged recovery signal," with above-average gains recorded in
the auto sector. A survey conducted in Southwest Michigan has shown
solid expansion for several months, and sharp gains in the
employment and production components of the June index joined
continued expansion in new orders.
Reports by individual manufacturers suggested continued gains in production of consumer durable goods, while reports from capital goods manufacturers were mixed. A large steel producer reported that its order book points toward shipment increases through the end of the third quarter (on a seasonally adjusted basis), and additional growth is anticipated in the fourth quarter as well. This contact cited strength in orders from auto and appliance manufacturers, while bookings from producers of construction equipment, agricultural machinery, and office furniture remained soft. A large electronics supplier reported that new orders gains, which began in April, continued through June. A manufacturer of paper containers reported that year-over-year shipment growth returned in June, after new weakening was recorded earlier in the second quarter. This contact also cited strength in orders from appliance manufacturers. A survey of printers indicated modest yet clear improvement in orders from District manufacturers in May and June. Heavy-duty truck orders softened in June, but only after an earlier surge generated by a price increase announcement, and one large manufacturer delayed a temporary factory shutdown for the second time. Several other capital goods producers, which typically lag in the early stages of a recovery, reported that orders remain soft. Sales and rentals of construction equipment remained weak. Promotional activity bolstered sales of agricultural machinery in the second quarter, but one manufacturer stated that diminishing earnings prospects have dampened farmers' capital spending plans, both domestically and internationally.
Agriculture
Crops in major portions of the District have been under considerable
stress recently because of the drought-like conditions that have
prevailed since the end of May. The hardest hit areas stretch from
north central Indiana to central Iowa. Many observers believe that
corn yields in the hard-hit areas suffered considerable irreversible
losses during the past two weeks. Forecasts of continued hot and dry
weather during early August raise the possibility of more extensive
crop damage, especially for soybeans.
Financial Markets
The need to strengthen capital positions and uncertainty over the
future course of financial market regulation continued to suppress
the demand for and supply of District bank credit. One large bank
reported that its loan portfolio declined in the second quarter,
despite the bank's growth objective. Customer demand ebbed in
several areas, including cyclically-sensitive working capital
financing. A middle-market bank in Michigan reported net shrinkage
in its loan portfolio in recent months, after showing growth through
most of 1990 and into early 1991. A contact with this bank stated
that improving customer cash flow led to higher levels of debt
retirement, which combined with low levels of demand for new
financing to produce a net decrease in the portfolio. The surge in
long-term debt issuance since the first quarter also contributed to
the decline. A bank economist cited uncertainty over the future
structure of financial market regulation as an important factor
affecting banking markets.
Commercial construction loans secured by real estate continue to weigh on bank capital positions, according to a recent survey of large District banks and branches of large foreign banks. Roughly one-third of these loans that expired over the past year were retired as specified in the loan contract. Most respondents expect the proportion of loans requiring renegotiation or foreclosure to rise over the next twelve months. However, most respondents had not yet committed to internal refunding of the credits scheduled to mature over the next year, and few contacts had purchased commitments by other lenders to provide takeout financing. Still, several lenders reported making new commercial construction loans in 1991, suggesting that at least some credit-worthy projects continue to find funding.