January 22, 1992
Summary
Most sectors of the District economy softened over the past six
weeks, although there were signs of improvement in several key
sectors. Reports from retailing contacts suggest that sales over the
holiday season were essentially flat with a recessionary year-
earlier period. Auto sales generally remained weak around the
District, although several large dealers reported solid sales
improvement in recent weeks. Combined car and light truck production
schedules call for first quarter 1992 assemblies to be even with the
fourth quarter of 1991 on a seasonally adjusted basis. New softening
in production outside the auto industry also contributed to recent
weakness in District manufacturing activity. As a result, District
manufacturing employment softened as the year ended. Lower home
mortgage interest rates have mainly generated higher levels of
refinancing activity, but have also sparked some improvement in the
District's home resale market.
Retail Sales
District retail sales for the holiday season were about flat with
weak sales last year, despite widespread discounting and heavy
promotional activity. Large retailers reported that sales in the
District generally followed the national pattern. This is in marked
contrast with last Christmas, when District sales held up well
compared to the national average. One large chain stated that
discount-driven sales gains (on a year-over-year basis) recorded in
the last two weeks of December reversed a sharp year-over-year sales
decline early in the holiday season. Sales strength was concentrated
in soft goods, and inventories of many items, especially "big-
ticket" appliances, remained above plan. Another large chain
reported that year-over-year sales gains improved as December
progressed, with small appliances performing relatively well, This
chain's sales in District markets were mixed, but showed some
improvement from previous months on a seasonally adjusted basis. The
company's inventory remains well above plan, and the firm is
committed to cutting stocks further. A large survey of independent
retailers in Illinois and Northern Indiana indicated that year-over-
year sales declines worsened over the latter half of 1991. The
preliminary results of a post-holiday survey of Michigan retailers
showed that the percentage of stores reporting year-over-year sales
declines for the holiday season was well above "normal" levels. A
manufacturer's representative stated that financing receivables from
several large discount chains grew increasingly difficult in recent
months, citing growing lender concern with the retailers' credit
quality.
Autos
Reports from auto industry contacts generally indicated continued
weakness in both car sales and production, although two recent
reports from large auto dealers suggested some improvement in
consumer demand. A supplier of financial services to many District
auto dealers reported that most dealerships' sales remained weak. A
domestic auto producer stated that dealer orders remained weak, and
showroom traffic has yet to improve from fourth quarter rates.
Reports of continued sluggishness in auto sales are not universal,
however. One of the largest dealers in the District stated that
sales improved markedly during December and early January, citing
improvement in customer and salesperson confidence. This dealer has
begun to rebuild inventory, after remaining extremely cautious over
the latter half of 1991. Another large dealership is optimistic
about sales in the first half of 1992, and recently ordered a "slew"
of lower-priced new cars in anticipation of a surge in sales.
Declining interest rates have substantially reduced this
dealership's inventory financing costs. An auto industry analyst
expects combined car and light truck production in the first quarter
of 1992 to be essentially flat from the fourth quarter of 1991 on a
seasonally adjusted basis, although first quarter car production
depends on planned assemblies that have been pushed forward into
March. If sales do not improve as the first quarter progresses, this
analyst expects production schedules to be cut further, making the
auto sector a drag on the District economy.
Manufacturing
Purchasing managers' surveys and direct contacts suggest that the
recovery in District manufacturing activity stalled late last year,
and industrial production in the District may have declined on a
seasonally adjusted basis. The Chicago purchasing managers' survey
index, like that for the nation, weakened in December, and dropped
below 50 percent for the first time since June 1991. Significant
declines in the production, new orders, and order backlogs
components accounted for most of the weakness in the overall Chicago
index, while the inventory and employment components remained below
50 percent. Likewise, the most recent surveys in Detroit, Milwaukee,
and Southwest Michigan each indicated some loss of momentum. A large
appliance manufacturer stated that first quarter shipments were
expected to be below a weak year-ago period. A large manufacturer of
heavy equipment noted that orders from customers in primary metals,
paper, and petrochemical industries remained soft in December and
early January, with little sign of a turnaround in sight. A large
manufacturer of communications equipment reported that orders
remained mixed, citing weak demand from two key markets--
construction and state and local governments. At the same time, this
manufacturer stated that December orders for semiconductors were the
highest for that month since 1987, despite continued weakness in
orders from the auto and personal computer markets.
Employment
In November, total payroll employment in the District fell
significantly on a seasonally adjusted basis, led by the first drop
in District manufacturing employment since April. The continued
decline in national manufacturing employment in December was
concentrated in several key District industries, including
industrial machinery and fabricated metals. The results of
purchasing managers' surveys also suggest that District
manufacturing employment continued to weaken in December. The pace
of layoff announcements by District firms appears to have increased
in recent weeks, and could affect future employment in a wide
variety of industries, including consumer goods manufacturing,
transportation, technology, and communications. Most of the major
plant closings that are likely to follow General Motors'
restructuring announcement are expected to be outside of the
District, but the impact on white-collar employment and independent
parts suppliers will put a further drag on District employment.
Unemployment rates in Illinois, Indiana, and Michigan have been
running above the national average, and Illinois' unemployment rate
rose from 7.7 percent October to 9.3 percent in December. The
District employment outlook still has some bright spots, however.
Several Chicago-area executive recruiters reported significant
increases in recent weeks in the number of manufacturing firms
looking to hire people, although improved demand has been
concentrated in requests for higher-skilled personnel. A placement
firm specializing in technically-oriented sales and marketing
personnel reported that "business is booming." After a significant
decline in the first three quarters of 1991, this firm enjoyed a
record fourth quarter. Another placement firm noted that "we are
seeing a lot of optimism on the industrial side." One recruiter
stated that strength in demand was even evident in the steel
industry.
Real Estate/Construction
Reports from District realtors and financial institutions indicate
that lower home mortgage rates have principally affected refinancing
activity, but have also helped spark some improvement in the
existing-home sales market. A large realtor reported the best
December sales month in its history, with transaction volume
substantially higher than in December 1990. One financial analyst
stated that consumers' gains from refinancing could be postponed,
however, as refinancing volume is taxing processing capacity. This
contact reported that smaller banks appeared to be increasingly
interested in making new residential mortgage loans in recent weeks.
Commercial construction remains weak, and cement shipments and
construction contract awards suggest that overall building activity
in the District is now about as weak as it is nationally. A large
cement producer specializing in commercial construction in the
Chicago area reported that shipments declined substantially in
December from the previous year, and the December decline was much
sharper than the decline for the year to date. The outlook for this
firm's cement shipments is supported by the prospect of higher
public works spending in 1992, and the firm is also seeing
improvement in demand for cement used in residential construction
projects. Not one respondent to a recent nationwide survey of
commercial real estate professionals expected property prices, on
average, to rise, from 1991 to 1992. The anticipated median price
decline in the Chicago area was larger than decline expected for the
nation as a whole.