December 9, 1992
Summary
Seventh District economic conditions improved in October and
November. Consumer spending continued to advance on a seasonally
adjusted basis, and appears to have gained momentum in recent weeks.
Retrenchment was evident in the District's manufacturing sector in
August and September, but activity seems to have stabilized and
moved somewhat higher. Automakers' appraisals of market conditions
were much improved compared to the third quarter, when production
edged downward. Household survey data depict a significantly more
robust recovery in District labor markets than establishment survey
estimates, and a quarterly survey of hiring plans showed continued
improvement in the Midwest. However, large firms generally have
stated that hiring in 1993 will be restricted even in the event of a
significant economic upturn. Reports on commercial and industrial
loan demand were mixed but suggestive of some strengthening overall.
A record soybean harvest is nearly complete, but extensive rains
have led to major delays in the corn harvest.
Consumer Spending
Consumer spending in the District appears to have moved higher in
October and November, and retailers' expectations for holiday sales
gains rose in recent weeks. One recent survey showed that the
percentage of Michigan retailers expecting holiday sales increases
reached the highest level in the past eight years. The survey's
director stated that "this is a clear break from the uncertainty of
the recent past." Another holiday sales survey indicated that a
greater share of retailers in Illinois and southern Wisconsin expect
sales gains than the national average. A discount retailer reported
that sales stalled out during election week, then reversed and
strengthened significantly in mid-to-late November. This retailer
raised its forecast for sales in the holiday season, and is now
looking for its best year-over-year holiday sales increase (in real
terms) in the last eight years. A survey conducted by a check
processing firm indicated that day-after-Thanksgiving activity rose
over 10 percent in the Midwest, compared to 5 percent nationally.
One District retailer reported that same-store sales gains improved
over the Thanksgiving weekend in spite of bad weather.
Autos
After losing some momentum in the third quarter, the auto industry
contributed to growth in the District economy in recent months. A
large automaker stated that dealer orders had been lagging sales as
the market softened in the third quarter, but orders turned around
and rose faster than sales during October and early November.
Another automaker noted that recent light truck sales gains have
been well distributed by product category, with new increases in
sales of full-size pickups (which are primarily for commercial use).
Dealer complaints about the "upside-down" problem (where used car
trade-in value is less than the outstanding loan balance) have been
on the wane, according to another automaker, and there has been a
substantial increase in the number of debt-free vehicles on the
road. One automaker noted continued increases in used car prices,
which also could help buoy the trade-in market. Increasingly
optimistic appraisals of sales trends were joined by higher
expectations for production, although significant gains were not
expected to develop until the first quarter of 1993. Another
automaker noted that the scheduled gain in car production in the
first quarter of 1993 would be the best (on a seasonally adjusted
basis) in the last two years, although actual assemblies are
dependent on dealer orders holding at current levels.
Manufacturing
District manufacturing activity moved sideways to modestly higher in
October and November, and reports from individual firms took on a
more positive tone following the national election. A majority of
District manufacturers continued to report production gains in
various purchasing managers' surveys. That majority grew
increasingly thin during the third quarter and into October,
although some improvement was evident in the Chicago survey for
November. The price component of the Chicago index fell for the
fifth consecutive month in November, reaching one of the lowest
levels in the past five years. The production component of the
Milwaukee survey joined its counterpart in the Chicago survey by
falling in October and rising in November, but signaled expansion in
activity during both months. Surveys conducted in Western Michigan
were summarized in October by the survey's director as indicating
that "things are flat and getting flatter," although modest
improvement was noted in November. A survey of metalworking firms in
the Chicago area indicated some slowing in the rate of recovery in
October.
Reports provided by individual manufacturers were more optimistic in recent weeks than in October. A manufacturer of parts used in heavy machinery stated that "after the usual lead times following the end of a recession, we are beginning to sea a recovery in capital goods markets." This company also noted that sales of controls for household appliances continue to benefit from the housing recovery. A large appliance manufacturer expected industry-wide domestic shipments to rise modestly again next year. A chemical company reported that sales of coatings used in finishing consumer durable goods are "by far our strongest" area, principally due to strength in sales of housing-related products like cabinetry and furniture. At the same time, this contact noted that sales of coatings used in general industrial purposes remained soft. An office furniture manufacturer stated that sales stopped declining in August, and have experienced a modest but consistent recovery since then. A large manufacturer of fluid power equipment reported that the heavy-duty truck market "is clearly the strongest area of our business." Assemblies have grown slower than orders, mainly because OEMs have been trying to lock in production for later-than-usual delivery next year. However, this contact did not express concern about the prospect of order cancellations, and expects heavy-duty truck assemblies to rise nearly 20 percent in 1993.
Employment
District labor markets continued to recover in recent months,
although measuring the extent of the recovery is difficult with
available data. Establishment survey data suggest that total
District nonfarm payroll employment was flat to slightly higher in
recent months, but household survey data and reports from temporary
help firms suggest a stronger upturn may be underway. According to
household survey estimates, District employment began a significant
recovery late in 1991, and by August 1992 had returned to pre-
recession levels. More recently, the unemployment rate fell markedly
in Illinois over the four months ended in October, as a sharp
decline in the number of people reporting themselves unemployed was
joined by a significant increase in the number of people having a
job. A quarterly survey of employer hiring intentions indicated
renewed improvement among Midwest firms. Anecdotal evidence for a
recovery in permanent employment among larger District companies
remained sparse at best, however, with most firms indicating that
productivity gains are expected to restrict hiring, even if economic
growth increases. A large retailer stated that retailing is rapidly
becoming more capital intensive. A communications company reported
that continued growth in telephone line installation has been driven
partly by a trend among its customer base towards substitution of
labor with capital. A large food processing company stated that "as
we put capital in, we take people out."
Banking
Reports from large banks on the demand for their commercial and
industrial loans were mixed but suggestive of some strengthening
overall. Those banks reporting improved demand cited customers'
financing needs for capital spending more frequently than for
inventory investment. Several banks reported having undertaken
efforts to strengthen capital positions in recent months; planned or
actual equity issuance was the most frequently cited measure. Loan
sales and securitization initiatives were noted more frequently than
credit standard tightening. Regulatory capital positions were
characterized as adequate or comfortable by each bank contacted.
Credit standards and loan terms were largely unchanged, although a
minority of respondents noted a modest decline in the spread between
loan rates and base rates.
Agriculture
Farmers in District states have nearly completed what is estimated
to be a record soybean harvest, but progress in harvesting the
record-large corn crop is characterized as the slowest in 20 or 30
years. As of November 22, a third of the corn acreage in District
states was still waiting to be harvested. The high moisture content
of this year's slow-to-mature crop accounted for the initial harvest
delays. More recently, extensive rains have limited the amount of
field-drying and rendered many fields too muddy. The harvest in
several areas of the District may not be finished until well into
the winter months. The field losses on the remaining acreage will be
larger than normal. The losses will be costly to individual farmers
but are not likely to alter the overall implications of a record
crop.