March 18, 1992
Summary
The Seventh District has experienced a slow but increasingly
widespread advance in economic activity since the end of January.
Recent indicators of regional economic activity generally signaled
expansion in February. Most manufacturers reported flat to modest
improvement in activity and expect production to improve in the
months ahead. Auto dealers' orders over die last month have been
better than the industry expected, but auto suppliers have seen only
limited improvements in their orders. Several retailers have also
indicated "surprisingly strong" sales in February, even though part
of the improvement over year-ago levels still reflects weak sales
last year. Housing activity in the District picked up markedly in
February, aided in part by unseasonably warm weather. Business
lending activity has changed little in recent months, but an
increase in loan demand was noted in selected markets.
Regional Indicators
Indicators of District economic activity for the month of February
were generally positive. Purchasing managers' surveys for Chicago
and Milwaukee showed solid gains in orders and production, although
their employment indexes remained relatively weak. The Detroit index
switched from signaling widespread contraction to modest expansion
in both non-auto and auto-related businesses, led again by increases
in production, orders, and--for nonauto-related businesses-vender
performance. Purchasing managers' reports taken over the second half
of January for Western Michigan, which is more dependent on office
furniture and appliances than autos, indicated some slowing in the
overall rate of decline in that area's activity, although several
survey participants stated that business was picking up or was
expected to pick up by the end of the first quarter. Help-wanted
advertising in the Midwest region declined slightly in January,
although in recent months it has been holding up somewhat better
than in other regions. A survey of hiring activity in the region
expects hiring to be down this quarter, but to rebound in the second
quarter.
Manufacturing
Reports on manufacturing activity in the District have turned
increasingly positive since the last report, although some producers
were still reporting that activity has remained depressed since the
end of last year. Several auto producers report a marked improvement
in dealer orders for light vehicles, especially minivans, since the
end of January, and one producer has begun to revise production
schedules upward. Car orders remain weak relative to light truck
orders, but car production this quarter is still expected to be
slightly higher than in the fourth quarter on a seasonally adjusted
basis. With sales rates running above production rates, several
sources expect that dealers will have to increase car orders soon.
While several auto suppliers are anticipating an increase in auto production, improvements in their auto-related activity has not yet appeared. One supplier noted that delivery schedules to auto producers have stabilized in recent weeks, suggesting that auto production plans are firming. A supplier of transmissions stated that sales were down in January, although spot improvements were noted, particularly in 5-speed transmissions. A steel producer reported that first quarter bookings show a seasonally adjusted improvement over the fourth quarter. However, gains were not attributed to autos, but rather to an increase in orders from steel service centers, which generally derive their demand from small industrial customers.
Consumer Spending
Several District retailers reported solid year-over-year gains in
same-store sales during January and February, even when considering
the weakness in sales a year ago. A large discount chain reported
improved sales, particularly in home products, despite intense
competitive pressure on prices. Nondurable-goods producers are
offering attractive bulk deals to large retailers, apparently to
reduce inventory, and retailers are running special promotions to
take advantage of the deals. A major department store chain, which
recorded double-digit sales growth in January, continued to post
equivalent year-over-year gains in February, led by furniture and
appliance sales. A survey of retailers in the Northern Illinois and
Indiana area suggests that recent sales gains are concentrated among
department stores, while sales at specialty stores continue to be
weak. However, one retailer noted that department stores suffered
greater weakness a year ago than the specialty stores, which may
account for the current difference in performance.
Several auto dealers were upbeat about February auto sales. Traffic has been improving since the end of last year, according to several contacts. One Michigan dealer recorded the best February in the franchises' ten-year history. According to another dealer, "nearly new" program cars are still an important source of dealership sales, but reduced availability of program cars over the next few months should shift the mix of sales toward new cars.
Housing Activity
Gains in housing starts for the Midwest in January were followed by
a surge in new home sales in February. A larger realty firm noted
that existing home sales in the Chicago area began to strengthen in
January, and sales for the firm continue to run about 25-30% above
"normal" levels for this time of year. Gains are attributed to lower
interest rates, a mild winter, and stable house prices. Home
builders are reporting an upward trend in sales, and one developer
has started planning two new projects in the Chicago area. A
supplier of building materials sees an unmistakable uptick in sales,
with sales to professional home builders in the Chicago area up 40%
from a weak year-ago period.
Banking
Business loan activity in the District has changed little since the
end of last year, but several large banks in the District cited
signs of improvement in loan demand from middle-market businesses.
With credit standards unchanged, several banks cited weak loan
demand, rather than credit availability, as the reason for the lack
of improvement in lending. However, a bank economist reported a few
cases of customers seeking financing to activate capital spending
programs that had been postponed in the fourth quarter. One bank
reported some increase in loans to small businesses for the purpose
of financing inventory. Mortgage demand was moderately stronger at
some large banks, but unchanged at others. An auto dealer noted that
effective interest rates on new auto loans declined in recent
months, as local banks have become more aggressive in their lending
than at the end of last year. However, several large banks reported
little change in demand for consumer installment loans.