June 17, 1992
Summary
Manufacturing activity in the Seventh District generally continued
to post gains in recent weeks, while conditions in service-related
industries were more mixed. Reports from manufacturers, supplemented
by business surveys, depicted a widening of the recovery in the
District's industrial sector, with renewed gains for capital goods
producers joining continued strengthening in production of consumer
durable goods, primarily autos. The lengthening recovery in the
motor vehicle sector has been accompanied by improved results
reported by a wide variety of producers of auto parts and capital
goods. Business-related services offered increasingly optimistic
reports, while some consumer-related services indicated a slower
pace from earlier this year. Cool, dry weather has adversely
impacted the early development of many District crops. Price
increases generally remained modest, and most contacts noted that
efforts to raise prices have been strongly resisted.
Manufacturing
The manufacturing sector continued to strengthen in recent weeks, as
reports from manufacturers and business surveys indicated further
gains in industrial activity in the Seventh District. A large steel
producer reported that orders have been building faster than the
normal seasonal pattern, and year-to-date bookings are substantially
above a weak year-earlier period. A manufacturer of hydraulic
equipment expected a modest but continuing recovery, with a boost
from Caterpillar's return to production. Strengthening in production
of off-highway vehicles was also indicated by a motor vehicle parts
supplier, who stated that orders have turned higher since the first
quarter. A large chemical producer reported that orders have been
"very positive." singling out engineered plastics used in
automobiles. A large manufacturer of machine tools reported that the
firm's bookings have risen substantially since the beginning of the
year, with strength in orders from motor vehicle manufacturers
joined by improvements in demand from producers of industrial
machinery, farm equipment, and construction machinery. However,
retail sales of farm equipment remained soft through May, according
to a large manufacturer, and the firm recently shaved ifs forecast
for 1992 shipments.
Recent surveys supported anecdotal evidence of further strengthening in District manufacturing activity. The composite index for the Chicago purchasing managers' survey climbed higher in May, led by production and new orders. The new orders component has posted marketed improvement in recent months and has risen to levels well above those that prevailed prior to the onset of the recession. The overall index for the Detroit survey was essentially unchanged in May, after climbing to its highest level in the past three years during April. Purchasing managers' surveys in Milwaukee, Southwest Michigan, and Indianapolis have also been posting results consistent with a recovery in recent months. Finally, an April survey of metalworking firms indicated solid gains in production, orders, and employment with above-average results posted in a key activity considered to be a leading indicator for metalworking firms as a whole.
Motor Vehicles
Domestic motor vehicle sales and production generally continued to
strengthen in recent weeks. One large automaker reported that
"dealer orders continue to look good," implying production in excess
of 100 percent of capacity (at straight time) at some plants in
coming months. Auto dealer optimism has improved faster than actual
showroom traffic, because closure rates and traffic quality have
been rising. Another automaker reported that fleet purchases
continue to take a lower share of deliveries, while program cars are
accounting for a lower share of the retail sales mix. Used car
prices, a good coincident indicator of retail sales of new cars,
have climbed higher over the past few months. Light truck sales have
exceeded forecast, and there is "no sign of weakening here." One
producer noted that light truck production has increased
substantially during 1992.
Reports of improving activity front motor vehicle suppliers generally reinforced these observations. For example, one manufacturer reported a pickup in sales as well as production planning, and the firm has reached the point where "we can't do the work we have to do with the labor force we have." A manufacturer of power train components stated that its strongest market now is heavy-duty trucks, where orders have shown a substantial acceleration in the past several months, although efforts to hedge against a price increase anticipated later this year may be playing a role in recent gains. However, this contact also noted that the medium-duty truck market still faces soft demand in some customer classes, notably construction contractors and state and local governments.
Business and Consumer Services
Suppliers of business-related services reported higher levels of
activity in May, but some softening in retail sales growth has
followed a robust first quarter, A large temporary help firm stated
that "we are very much encouraged by recent trends." Demand began to
turn up toward the end of last year and momentum has moved higher in
recent weeks. While the national improvement has been broad-based,
demand by industrial firms for temporary employees is above-average.
With its large manufacturing base, employment in the Seventh
District has been outperforming other regions. After a trough in
January, industrial power sales in Western Michigan continued to
post solid increases in recent months, reflecting improvement in
appliance and motor vehicle production, Another large utility in
Michigan reported that a leading indicator of business conditions in
the Detroit area continued to improve through May. One large
retailer reported that year-over-year sales gains continued to
soften in recent weeks, although sales of durable goods continued to
hold up relatively well. Last year at this time, sales were picking
up after the end of the war, leading to some softening in the
current year-over-year comparison, but the firm's inventory has
again risen above plan after progress was reported in shaving it to
desired levels earlier in the year. Some concern with the effect of
softening in sales on inventory levels was also expressed by another
major retail chain, where sales in May and early June were
essentially flat compared to last year.
Agriculture
Rapid progress in May culminated in a "faster-than-normal"
completion of the spring planting season for most District farmers.
However, early-season development of most crops has been slow due to
cool temperatures and very dry conditions. Northern portions of the
District were hit by a frost in late May, causing modest damage to
corn and soybeans and more extensive damage to fruits and
vegetables. In some cases, farmers may be able to offset the frost
damage by replanting.
Prices
Reports indicated that price increases, on balance, remained modest
A steel producer reported that an attempt by the industry to reduce
sales discounts "fizzled out" in April, but producers are still
experiencing price increases on purchased materials, and have
announced the intention of increasing sheet prices in July. A large
automaker stated that there was little sign of price pressures from
parts suppliers and does not expect the recently announced steel
price hike for July to hold. However, new car sales volume (in
units) has been held back somewhat by a 2 percent quality-adjusted
increase in prices over the past year, primarily for foreign
nameplates. An auto parts manufacturer acknowledged some price
pressures from its own suppliers and, in turn, reported seeking
price increases from large automakers. Another auto parts
manufacturer reported that obtaining price increases is "extremely
difficult." Crude oil and natural gas prices have firmed in recent
weeks, according to a large refiner, primarily due to increased
demand. A chemical producer reported that a cyclically-sensitive
index of product prices has been relatively flat since last August,
although some strengthening has been evident in recent weeks. A
large personnel company reported that wage pressures have been
minimal, and stated that "we don't see pricing coming back," despite
improved demand in recent months.