August 5, 1992
Summary
The Seventh District economy continued to recover in June and early
July. but at a slower pace than in May. Establishment survey data
indicate that the recovery in District employment has been better
than the national average, although recent reports on District labor
markets were mixed. Retailers indicated that consumer spending
growth remained sluggish but positive. Manufacturing activity
continued to lead the District's recovery, and increased motor
vehicle production is expected to make a significant contribution to
industrial production in the third quarter. District housing
activity regained some momentum after recent declines in mortgage
interest rates. Bank lending in the District continued to improve in
recent weeks, although gains were concentrated in new residential
mortgage loans and refinancing. Timely rains have alleviated the
drought concerns of District crop farmers, while conditions faced by
livestock farmers were mixed.
Employment
Establishment survey data indicate that District employment through
May had recovered roughly one-fourth of its recessionary downturn,
but more recent reports on labor markets were mixed. The employment
component of most District purchasing managers' surveys generally
continued to move higher in recent months, reaching levels
consistent with stable or modestly increasing manufacturing
employment. A private survey showed improvement in firms' hiring
expectations for the third quarter, with reports for firms in the
Midwest exceeding the national average. Some individual
manufacturers reported plans to make significant employment
increases in coming months. However, new hiring continues to be
countered by the effects of previously announced layoffs, and there
was little slowing in layoff announcements in District newspapers.
Help-wanted advertising around the District has shown modest
improvement in recent months, while initial claims for unemployment
insurance gradually moved higher in most District states in June and
early July.
Consumer Spending
Consumer spending growth was flat to slow in most areas of the
District in June and early July. One large retail chain reported
that sales in District markets were mixed, but year-over-year
comparisons generally strengthened after some softening in trend was
noted early in the second quarter. This contact reported that
inventories were again in line with plan. after the unplanned
increases noted in recent months. Another large retail chain
reported that sales in District markets softened during June and
early July, after exhibiting strength (relative to the national
average) through most of last year and into 1992. Consumers' efforts
to pare debt levels continued to dampen sales, according to this
contact, although renewed strength in mortgage refinancing was
expected to contribute to improvement in sales during the rest of
1992. A survey of retailers in Illinois and Indiana indicated some
loss of momentum during May, while a retailers' association in
Wisconsin stated that its membership continued to be relatively
insulated from demand weakness in other parts of the country.
Reports from auto dealers and manufacturers indicated that retail
sales closure rates continued to move upward in recent months. One
of the largest auto dealers in the District reported that sales and
traffic strengthened through the end of June. However, this contact
noted that business softened in recent weeks, following the release
of the unemployment rate for June.
Manufacturing
Manufacturing activity continued to lead the District's recovery
through June and early July. Purchasing managers' surveys in
Chicago. Detroit, Milwaukee, Iowa, and Western Michigan generally
indicated continued gains in production and new orders. Slower
growth was suggested by several of these surveys during June, but
the Chicago survey for July suggested expansion picked up further
upward momentum, led by production and new orders. Reports from
individual manufacturers were mixed, with strength concentrated in
production of consumer durable goods. An appliance industry
representative reported that industry shipments growth increased
during the second quarter on a seasonally adjusted basis, while
orders continued their gradual recovery through June. One appliance
manufacturer reported that orders and shipments have exceeded
expectations thus far in 1992, although some concern with customer
inventory building was also noted. Steel production in the District
has been flat in recent months, although one manufacturer noted that
orders were building somewhat faster than normal seasonal patterns,
citing strength in orders for steel used in autos, appliances, and
residential building. Several contacts noted that third quarter
motor vehicle production plans are solid, calling for a significant
increase from the second quarter.
Reports on capital goods production were mixed. A large truck manufacturer reported that heavy-duty truck orders and production continued to exhibit marked improvement in recent months. This contact stared that orders from customers in the District have been exceeding the national average. A large electronics firm reported modest but consistent improvement in orders through June, citing renewed strengthening in the market for computer hardware. Several capital goods producers noted that weakness in domestic orders was at lent partially offset by export gains.
Residential Real Estate and Construction
Reports from housing industry contacts were generally positive, with
renewed strength in sales and construction following recent declines
in mortgage interest rates. One of the largest realtors in the
District reported a record month for June, in part due to market
share gains. A realtors' association stated that existing home sales
had strengthened since early July. A homebuilders association
reported that strong construction gains earlier in the year had been
followed by some softening in recent months, with relative strength
noted in home improvement activity. One homebuilder stated that
cyclical swings in activity have been concentrated in the upper end
of the market, and reported renewed strength in demand for higher-
priced homes following recent declines in mortgage rates. A realtor
stated that housing starts may be exhibiting higher volatility due
to lower inventories of land held by homebuilders. A large
manufacturer of plumbing and furniture products stated that orders
were still increasing, albeit at a decreasing rate, while shipments
in the second half of the year were expected to continue to improve.
Increased residential building activity and highway construction has
generated consistent improvement in cement shipments in the District
for the past five months.
Banking
Lending by District banks continued to improve, with gains
concentrated in residential mortgage lending. Many contacts noted
that recent declines in mortgage rates have again stimulated
refinancing activity, although new mortgage lending also rose in
recent weeks. Reports on commercial and industrial lending activity
were mixed. A middle-market lender reported that credit line
utilization in June and early July remained relatively flat, and
stated that capital spending among its customers had been
insensitive to interest rate changes. Another middle-market lender
reported that borrower demand softened again in recent weeks.
Several law firms involved in loan contract negotiations reported
increasingly aggressive lending postures among banks, but a pickup
in borrower demand remained relatively sluggish.
Agriculture
Frequent and extensive rains throughout the District during July
have offset earlier drought concerns and significantly enhanced the
condition of growing crops. Reflecting this, an unusually high
proportion (about 85 percent) of the corn and soybeans in Illinois,
Indiana and Iowa was rated "good" or "excellent" as of July 20.
However, the frequent rains have also delayed the completion, and
the quality, of the District's wheat harvest. Low temperatures
continue to slow the pace in crop development and add to the risk
that a frost could yet cause damage to fail-harvested crops.
Conditions for the District's livestock farmers are mixed. Following
a sharp downturn last year, milk prices have rebounded considerably
this year. However, the continuing upswing in pork production will
weigh heavily on hog prices this fall and well into next year. The
latest estimates show hog numbers are up 5 percent from a year ago
and 10 percent from two years ago, both in District states and
nationwide.