November 4, 1992
Summary
The composition of Seventh District economic expansion shifted in
September and early October, as disruption in the auto industry
combined with a sense of uncertainty to contribute to mixed reports
from the District's manufacturing sector. In contrast to earlier in
the year, when manufacturing activity led the District recovery,
consumer spending now seems to be supporting income gains in the
region. Growth in retail sales and housing activity continued in
September and early October. Reports on commercial and industrial
loan demand were mixed A record corn and soybean harvest is well
underway. Many contacts shared the perception that the nearing
election has played a role in dampening economic activity, but they
differed on the reasons why.
Retailing
Retailers indicated that sales growth continued in much of the
District in September and early October. However, sales of durable
goods were mixed, as growth in sales of housing-related products was
offset by some reports of sluggish demand for cars. A large retailer
expected its fourth consecutive monthly increase in same-store sales
in October on a seasonally adjusted basis, led by durable goods
linked to housing activity. This firm also reported that growth
resumed in its outstanding customer credit in recent months, as new
credit sales offset the continuing liquidation of existing credit
balances. A large discount store chain reported little change in a
trend of modest improvement in most District markets in recent
months. A store chain selling mid-priced apparel experienced
significant sales gains in September and October, and a regional
analyst's survey of commissioned salespeople in department stores
also indicated higher growth in sales and customer traffic. A large
appliance manufacturer reported better-than-expected growth in
retail sales of its own products, but gains remained restricted to
inexpensive models within various categories.
Autos
Slower-than-expected growth in car sales combined with labor
disputes to lead to a decline in District auto production in
September and early October. One large automaker expected domestic
sales of light vehicles in the fourth quarter to be flat to down
slightly from the third quarter (on a seasonally adjusted basis).
Another automaker reported that retail sales of its cars generally
remained sluggish relative to pre-recession levels, but noted that
sales in most markets in the Midwest continued to hold up better
than the national average. One of the largest auto dealers in the
District reported that sales weakness has persisted after a slowdown
was first reported late in the summer, and this dealer recently
lowered reorders for 1993 models from the levels that were planned
earlier this year. An auto dealer exchange reported that used car
prices continued to rise in recent months, even as the volume of
trading among dealers declined, and this contact expressed
frustration with an unexpected shortage of used cars in its market.
After labor disputes contributed to an underbuild in third quarter
production, one industry analyst expects modest production gains for
light vehicles in the fourth quarter on a seasonally adjusted basis.
Manufacturing
While reports were mixed by area and industry, overall District
manufacturing activity lost some of its upward momentum in September
and October. Purchasing managers' surveys in Chicago, Detroit, and
Southwest Michigan generally indicated that expansion continued
through September, albeit at a slowing pace in several areas. The
Milwaukee survey for September showed especially strong results, but
other data and reports from individual firms largely indicated
softer conditions in more recent weeks. A large manufacturer of
heavy machinery reported modest growth in orders and shipments over
a weak year-earlier period, but expressed growing concern with
conditions in several of its markets. A producer of heating,
ventilating, and air conditioning equipment reported that demand
softened in recent months. A manufacturer of construction and
industrial equipment reported that shipments growth slowed since the
summer. The firm is still expecting a sales gain for the fourth
quarter, but distributors' sensitivity to price indicated that
underlying demand remained sluggish. A machine tool manufacturer
reported that bookings growth slowed during the third quarter, but
expected higher growth during 1993. A large manufacturer of
electronics reported that growth in industry orders has lagged
previous economic recoveries, but stated that the industry is "still
seeing good growth," and noted that its own orders have
significantly bettered the gains shown in national statistics. A
large truck producer stated that orders for its heavy-duty trucks
recently flattened out, and some other industry contacts expressed
concern about the vulnerability of heavy-duty truck orders to
cancellations. An association of machining companies reported
slowing production in September and October, citing production
cutbacks by a large automaker. A large steel producer reported that
its order book for fourth quarter production is full, but the order
book for first quarter 1993 production has been slow to build due to
weakness in orders from the auto industry.
Real Estate/Construction
Reports from realtors, banks, and other contacts were largely
consistent with statistical evidence of improvement in the
District's housing market, although several regions and market
sectors remained soft. One of the largest realtors in the District
reported a record month for sales in September, partly (but not
entirely) due to market share gains. This contact also noted a
modest upturn in its commercial mortgage business. A realtor based
in a healthy market reported some slowing in transaction volume on a
seasonally adjusted basis, but only after strong gains during the
summer. This realtor expected growth to resume in 1993. A large
association of homebuilders reported that an uptrend in sales and
building activity was little changed over the last three months
(after accounting for seasonal factors). Traffic slowed in recent
weeks, however, and the association does not expect acceleration in
growth in the fourth quarter; a contact noted that "there is a lot
of optimism among members about sales prospects in 1993." One large
homebuilder stated that traffic was falling off somewhat faster than
normal for this time of year, but expected demand to improve after
the election. A large manufacturer of construction materials stated
that production increases led to a further rise in its capacity
utilization in September and October, although price increases
became more difficult to implement. A large bank reported that
residential mortgage activity continued to exceed plan, due both to
refinancings as well as new lending.
Banking
Reports on trends in commercial and industrial loan demand were
mixed. A middle-market lender reported that loan demand recently
fell below expectations, stating that "clients' planning horizons
skipped the third and fourth quarter -- many people seem to have
decided to wait out the election." A regional bank holding company
noted that loan demand from retailers in its market remained
sluggish, despite a pickup in retail sales activity. A bank reported
a pickup in demand for loans from small and medium-sized
manufacturers and wholesalers, "mainly because borrowers are trading
money between banks, not because there is any surge in capital
spending." Reports from two middle-market lenders indicated that
demand for loans from commercial borrowers in Michigan was little
changed in recent months, while another lender reported increased
growth in loans to borrowers in Wisconsin. The leader of an
association of small banks reported that loan demand remained
sluggish, and stated that low confidence levels were the most
important reason for the continued insensitivity of loan demand to
lower interest rates. A large bank revealed increased loan demand
from companies expanding production and distribution capacity in
Mexico.
Agriculture
The fall harvest is well underway. The soybean harvest has
progressed at a near-normal pace and is now nearing completion in
most areas, except for Michigan where rain has slowed harvesting.
Progress with the corn harvest has been considerably slower than
normal because of the high moisture content of this year's crop. The
latest U.S. Department of Agriculture estimates suggest the corn and
soybean harvest will be up a fifth from last year and modestly above
the previous high set in 1985.