September 23, 1992
Summary
The pace of the recovery in the Seventh District slowed in August
and early September, with some sectors, notably autos, actually
weakening. District manufacturing activity generally continued to
move higher, albeit slowly and less evenly than in recent months.
Car production did not meet earlier expectations, and several auto
parts manufacturers expressed concern about the possibility of a
further slowdown in the fourth quarter. Retail sales and housing
activity in the region have held up relatively well in the face of
sluggish employment data. However, several contacts shared the
perception that hiring, capital spending, and consumer durable goods
purchases may have entered another "wait-and-see" phase. The
prospects for bumper corn and soybean harvests have risen in recent
weeks.
Manufacturing
District manufacturing activity edged higher in August, but at a
slower pace than earlier in the summer. Purchasing managers' surveys
indicated that expansion continued for a slim majority of District
manufacturers. The index for the Chicago survey slipped slightly in
August on a seasonally adjusted basis, but only after a relatively
large increase in July, and the level of the index remained higher
than in the nation as a whole. The overall results of the Detroit
survey have been generally consistent with those in Chicago,
although the Detroit index has been more closely linked to trends in
auto production, which weakened in July and August. The Milwaukee
survey had been providing the strongest results in the District
earlier in 1992, but this survey's overall index also indicated a
loss of momentum in recent months, reaching a level consistent with
slow growth in production. Separately, an August survey of small
manufacturers in Wisconsin indicated little change in expectations
for business activity over the next 6 to 12 months, with a majority
expecting moderate growth over this period.
Reports from individual manufacturers indicated that several sectors remained soft, although appliance production moved higher and the relatively improved heavy-duty truck market showed few signs of a slowdown. A large manufacturer of construction machinery reported that dealer orders for heavy equipment weakened further in August, although orders for light machinery have held up relatively well. A construction industry analyst reported that retail sales of construction machinery in the District were somewhat better than the national average. Retail sales of farm machinery continued to decline from year-earlier levels, and one District farm equipment manufacturer cut production plans for the third time this year. A large appliance producer reported a record July shipments month, and expected continued improvement in the overall market in 1993. Positive signals continued to emanate from the heavy-duty truck market. A manufacturer of parts used in heavy-duty trucks reported that the market has been continuing to strengthen, citing pent-up demand, confidence in the future growth of the freight hauling industry, and sales incentives. Net orders slipped in August, but only after a sharp jump in July. and this producer expected continued gains in its own sales and production in 1993. A manufacturer of heavy-duty trucks reported that the improvement in District demand has exceeded the national average. A manufacturer of fluid power equipment used in a variety of heavy industrial machinery stated that the recovery in its markets had accelerated since the spring.
Autos
Major automakers in the District characterized recent sales trends
as disappointing, and car production failed to meet earlier
expectations. Increases in sales and production of light trucks
continued to outperform those for cars during the month of August,
but one large automaker stated that dealer orders for light trucks
began to lag sales in recent weeks. Another domestic automaker said
that erosion in consumer willingness to purchase cars has played a
more important role than income trends in restraining car sales
recently, and noted that showroom traffic continued to improve while
sales closure rates weakened. Auto producers agreed that inventories
generally remained lean, and production would respond quickly to any
future sales pickup that might occur. An auto industry analyst
stated that some, but not all, of the production lost due to a
recent labor dispute would be made up in the fourth quarter. This
dispute was resolved at modest short-term cost to District activity,
but it reflected a deeper long-term problem facing the District
economy. One auto parts manufacturer stated that inventory building
prior to next year's renegotiation of the national labor contract
could boost production in the first half of 1993.
Consumer Spending/Housing
Retail sales and housing activity held up relatively well in recent
weeks. One large retailer stated that year-over-year sales
comparisons in District markets showed a positive trend in recent
months. This contact noted that sales gains were being led by big-
ticket items. Inventories at this firm were reported to be again in
line with plan, after reaching undesirably high levels earlier In
the summer, and the firm has stepped up its purchasing. Another
large retailer reported that, after accounting for the late Labor
Day holiday, underlying sales growth rose in August and early
September. Durable goods sales showed above-average gains, led by
appliances and home improvement products. The late Labor Day holiday
was often cited as a factor constraining August sales comparisons.
However, a large retailer and a bank each noted that a renewed wave
of mortgage refinancing also played a role, because upfront fees
postponed improvement in borrower cash flow.
Renewed declines in mortgage interest rates have been accompanied by scattered signs of strengthening in housing activity, although the increase does not appear to be as robust as in the first quarter. A realtors association reported that sales activity among its membership had strengthened in recent months, but was uncertain about the importance of lower mortgage interest rates in the improvement. One of the largest realtors in the District reported that transaction volume slipped in August on a seasonally adjusted basis, but only after significant gains in June and July. Recent declines in mortgage interest rates were followed by a modest revival in housing activity in Western Michigan, according to banks and realtors in that area. A large producer of construction materials used in homebuilding reported that production increases prompted the use of second shifts at several plants. This contact noted that shipments gains in the District roughly matched the national pattern in recent months, after relative strength was noted in the District earlier in the year.
Labor Markets
Recent employment reports have been subject to a variety of special
factors, but still suggested a slowing recovery in District labor
markets. Both establishment survey and household survey data
indicate that the recovery in total District employment lost some
momentum in recent months, although the underlying trend in
household survey data has signaled a more robust rebound than the
establishment survey. Employment changes in Illinois and Michigan
have been weak relative to those in other District states, largely
due to a continuing downturn in the two largest metropolitan areas
in the District. Excluding these areas, employment has reached pre-
recession levels, although the upward momentum slowed during recent
months. Private surveys suggested that hiring plans have weakened
since the second quarter, but not significantly, and hiring in the
Midwest remained stronger than the national average. Temporary help
firms reported rising sales gains, and placements in the District
continued to run ahead of the national average, but one firm
expressed concern about recent economic trends. This contact also
stated that demand in smaller metropolitan areas has significantly
exceeded demand in large cities.
Agriculture The fall harvest will be delayed this year due to slower maturing crops, but the prospects for a bumper harvest continue to improve as concerns for an early frost ease. The latest weather forecasts discount the likelihood of an early, crop-damaging frost. If that is the case, the fall corn and soybean harvest in District states is likely to be the second largest on record and up a sixth from last year.