May 5, 1993
Summary
Recent reports from businesses, trade associations and the results
of a variety of surveys indicate that economic expansion slowed in
the Seventh District in March and early April, but contacts'
expectations for renewed growth in coming weeks were guardedly
optimistic. Most retail and housing industry contacts stated that
bad weather curtailed sales growth in recent weeks. Little change
could be detected in the pace of expansion in manufacturing
activity, and manufacturers seemed comfortable with modestly rising
inventory levels. Price increases proceeded at a somewhat faster
pace in recent months, due at least in part to improvement in
demand. Weather conditions have delayed spring plantings.
Business Activity Indicators
An underlying upward trend in purchasing managers surveys around the
District generally remained intact in recent months, although
results were increasingly mixed. The overall index for the Chicago
survey slipped slightly in March, but remained at a level consistent
with expansion in manufacturing activity. The production components
of the Milwaukee and Detroit surveys continued to climb in March,
and these indicators have reached and exceeded pre-recession levels.
Purchasing managers surveys in Western Michigan signaled modest to
moderate improvement in March, in line with results for the first
two months of the quarter. Led by the auto sector, an index of
business activity in the Detroit area rose to a record high in
March, and the unemployment rate for the Detroit area has fallen
significantly over the last year. An index of business conditions in
a purchasing managers' survey in Iowa also continued so climb in the
first quarter, reaching its highest level in five years. An informal
survey of a variety of small manufacturing, construction, and
service firms in the District indicated that respondents were
largely upbeat with respect to appraisals of current conditions as
well as expectations for future activity, although several firms
expressed concern about the recent slump in measures of consumer
confidence.
Consumption and Housing
Most retail and housing industry contacts reported that unrelenting
poor weather joined with renewed consumer uncertainty, especially
about taxes. to dampen sales in March and early April. Continued
gains in retail sales of nonseasonal merchandise and increased
activity during breaks in the weather supported their expectations
for renewed growth in coming months, however. A large retailer
stated that sales growth was held back by concern over potential tax
increases, uncertainty about the impact of withholding changes, a
payback following aggressive promotion of credit sales in the
previous quarter, and "some of the soggiest weather in our history."
Sales reportedly surged, however, on several days when the weather
broke. This contact also noted that sales of nonseasonal items
continued to strengthen in recent months, helping to offset weakness
in spring apparel, and sales of furniture and housewares posed a
double-digit increase in the first quarter on a same-store basis,
reaching a record level. Another large retailer reported that credit
utilization continued to rise even though sales slowed in March (on
a seasonally adjusted basis), and sales rebounded in April, led by
durable goods and apparel. A large shopping center reported that
total sales increased (on a year-over-year basis) in March and early
April. After a lengthy dormant period for sales of spring
merchandise, this contact expected a burst in sales with the first
sustained period of nice weather, but noted that it hadn't occurred
yet.
Reports from bankers indicated that residential mortgage loan demand remained fairly strong, with continued relative strength in refinancing. A large homebuilder, however, expressed some frustration about a loss of momentum in traffic and sales in March, citing a reemergence of political uncertainty in addition to the bad weather. A report from an association of realtors indicated that closings slowed in the first quarter of 1993 on a seasonally adjusted basis, after a large increase in the fourth quarter last year. A report from a large realtor also indicated that transaction volume slowed in March, but activity seemed to pick up some momentum in April. This realtor stated that "the market is still pretty active," citing continued optimistic attitudes among salespeople.
Manufacturing
Reports from manufacturers and industrial trade associations
indicated little change in the steady upward trend in District
manufacturing activity, although pockets of weakness remained. Sales
of electricity to industrial customers in March were significantly
above the year-earlier period, according to one utility, largely due
to strength in sales to the auto industry. One automaker reported
that production of light trucks has been bumping up against capacity
limits. Two producers of molds used in automobile production were
experiencing a marked upturn in demand, which was attributed to
increased optimism about sales prospects in future model years. An
automaker reported that car sales strengthened significantly in the
first twenty days of April, after some loss of momentum in March. A
bank reported that auto loan volume rose an April, after softening
in the first quarter. Among respondents to the purchasing managers'
surveys in Western Michigan, above-average strength was reported for
producers of capital equipment, and auto parts manufacturers are
still doing somewhat better than firms in most other industries. An
association of electronics manufacturers reported that orders in the
first quarter ran at the highest level in the past five years, and
an association of home appliance producers reported a record level
of domestic shipments for a variety of products in March. One
appliance producer expected a record year for retail sales of
appliances (in units) in 1993. Weakness has lingered in several
manufacturing sectors in the District, however. A large diversified
manufacturer reported that orders for oilfield and airline
equipment, which had been weak for some time, fell off significantly
further in March. Retail sales of farm equipment in the first
quarter were slightly below soft year-earlier levels. New
strengthening was evident in one previously weak sector, however, as
a large manufacturer of construction equipment reported that sales
into commercial construction markets have been rising rapidly in
recent months.
Prices
Prices of a variety of commodities and final products have been
increasing at higher rates in recent months, due at least in part to
increased demand. The price components of several District
purchasing managers' surveys rose in recent months. The director of
two purchasing managers' surveys in Western Michigan noted that more
commodities were being reported in short supply and rising in price.
On the other hand, a large retailer reported that consumer
sensitivity to price remains high. A banker stated that inflationary
expectations may remain relatively muted, noting that the upturn in
plant and equipment spending among borrowers has not been
generalized, but specific by industry sector, by companies within
industries, and projects within companies.
Agriculture
A recent survey found that farmers in this District and elsewhere
intend to reduce corn acreage moderately this year while holding
soybean seedings close to last year's level. The combination of a
late harvest last fall and the wet and cool weather conditions of
this spring has significantly reduced the amount of fieldwork
completed so far for this year's plantings. Developments in the next
couple of weeks will be important as the first 10 days of May are
generally considered the optimum planting time for most of the
District's corn farmers. The delays experienced so far could be
quickly overcome with the right weather conditions. Alternatively,
continued delays could trigger a shift toward quicker-maturing (but
lower-yielding) seeds and/or encourage a shift from corn to soybean
acreage. Livestock producers have enjoyed unexpectedly high prices
so far this year. In contrast to the continued year-over-year gains
expected in red mea production, pork production was down nearly 3
percent in the first quarter while beef production was down nearly 4
percent. The unexpected declines stem partly from slower weight
gains due to the poor quality of last year's corn crop and the harsh
weather conditions confronting feedlot operators. With USDA reports
continuing to show larger inventories of hogs and cattle, most
analysts are expecting red meat production will move above year-earlier levels again this spring.