August 4, 1993
Summary
Economic expansion generally continued in the District in June and
early July, although flooding significantly disrupted activity in
affected areas. Reports from retailers suggest that sales growth in
the District picked up further upward momentum in June and early
July. Housing industry contacts indicated that sales of new and
existing homes continued to increase, although residential
construction growth may have slowed somewhat. Purchasing managers'
surveys and reports from individual firms depicted a modest slowdown
in the rate of expansion in overall industrial output, while the
pace of the recovery in motor vehicle production was little changed.
Flooding has inflicted considerable damage and hardship, but it is
not expected to threaten expansion in the overall District economy.
Agriculture has been the sector hardest hit by the flooding, and
crop prospects are under considerable uncertainty.
Retail Sales
District retailers were generally encouraged about sales activity in
June and July. A major chain reported solid growth in same-store
sales, led by continuing strength in appliances and improvement in
apparel. Sales gains in this company's stores in the Midwest
generally continued to outpace the national average, with little
impact from recent flooding evident in the company's regional sales
aggregations. Another large mailer reported that sales in recent
weeks have been "quite good," primarily due to the arrival of hot
summer weather. This arrival was tardy, however, and while apparel
sales strengthened, they did so at lower clearance-type margins, at
a time when margins have been under pressure more generally. This
firm characterized same-store sales gains in recent months as "kind
of soft", and revised its forecast for sales in 1993 downward
slightly. Another large chain reported increased sales gains during
late June and into July, with results in the Midwest outpacing the
national average (particularly in Michigan). This firm noted that
sales strengthening was evident in household products as well as
apparel. Several retailers reported improvement in sales in the
Detroit area, where new store opening programs have been announced
by a number of retail chains. A chain of warehouse stores stated
that demand from wholesale cash-and-carry customers (primarily small
businesses) is "a lot more robust now than it was two months ago."
Housing
Sales of new and existing homes held up well or continued to
increase in recent months, according to contact reports, but a
modest slowing in new home construction was also noted. One of the
largest realtors in the District reported a record month for unit
sales volume in June, and stated that appraisals of market
conditions among the firm's salespeople continue to improve during
the month of July. This contact noted that the prospect of higher
personal income tax rates was one potential factor promoting sales,
due to the increased value of the tax benefits of home ownership. An
association of home builders in the District characterized recent
trends as "good;" the quality and interest of buyer traffic has
remained relatively strong and sales have strengthened somewhat
further, particularly in the lower end of the market. At the same
time, however starts have slowed modestly, and this contact stated
that builders' comfort level with the overall economy may have
fallen off from earlier in the year. However, a major producer of
window and door hardware stated that its own production has been
"going bananas" in the last three months, following an increase in
orders that was largely unanticipated.
Manufacturing
Purchasing managers' surveys and reports from individual firms were
consistent with slowing but continued growth in District production
in recent months. Patterns in the production component of purchasing
managers' surveys in Chicago, Detroit, Milwaukee and Western
Michigan generally suggested a modest slowing in growth from earlier
in the year, but continued expansion was indicated for a majority of
respondents in each of these surveys through the month of June. A
July survey of metalworking firms indicated renewed strengthening in
momentum, following a slowdown in growth earlier in the year. The
association conducting this survey reported that member firms have
stepped up their apprenticeship training, after this activity "had
remained dormant for some time."
Manufacturing contacts generally reported little change or moderate improvement in their own sales growth, but political and economic uncertainties were often identified as a weight on business activity more generally. An automaker confirmed its announced production schedules for the third quarter, which call for a significant increase over the same period last year. Another automaker anticipated a brisk increase in domestic sales in the 1994 model year. A large producer of auto pins reported increased aftermarket sales, with higher unit volume as well as modestly higher prices. Two electric utilities in Michigan reported further strengthening in industrial sales. A manufacturer of heavy-duty trucks reported a substantial increase in sales growth in June, and noted that industry sales reached their highest level for June since 1979. However, one heavy-duty truck producer expected industry output to flatten out (at relatively high levels) over the remainder of the year. An industry survey indicated that heavy-duty truck order backlogs remain firm, with buyers still requesting deliveries on time or ahead of schedule. A large manufacturer of business furniture systems expected a modest real gain in industry sales in 1993, but not so strong an increase as the recovery during 1992. This firm stated that the potential for sales to the financial services industry is relatively strong, following the improvement in profitability in the industry in recent years. A large chemical producer gave a mixed assessment of the prospects for earnings gains in the latter half of 1993, partly due to continued pricing weakness. Several firms noted significant. continuing weakness in European markets, with one stating that this weakness was leading it to hold domestic capital spending "a little closer to the vest."
Effects of Flooding
Flooding has inflicted considerable hardship, damage and disruption
to the affected areas of the District, particularly Iowa and
portions of Illinois along the Mississippi. Insurance, disaster
relief, voluntary assistance and other offsetting effects are
anticipated to soften some of the losses. However, the full impact
on the overall District economy will not be known for several
months. Much retail activity has been shut down in flooded areas,
but stores also reported a run-up in sales in anticipation of the
floods, and retailers in neighboring areas have seen a pickup in
recent weeks. One major discount retailer revised its estimate of
sales in the region for 1993 substantially upward, because of the
sales expected to be generated in response to the flood damage. Most
manufacturers continue to operate outside of the flooded areas,
although some plants in Des Moines closed with resulting layoffs due
to power or water shortages after flooding of the Des Moines and
Raccoon rivers. Automakers reported some delays in shipments for
plants near the affected areas, but there were no significant
production disruptions. Distribution in the area has shifted to more
costly alternative routes where they are available. Hundreds of
small businesses were flooded out, although many flooded warehouses
were cleared before the water arrived. Agriculture has been the
hardest hit sector, with water damage not restricted to areas close
to the flooded rivers.
Agriculture
Extensive flooding and slow-to-develop crops add to the
uncertainties regarding this year's harvest prospects. Across the
District, crop conditions as of July 25th ranged from mostly "good"
in Illinois, Indiana, and Michigan to mostly fair-to-poor in Iowa
and Wisconsin. Assessments of the crop acreage covered by flooding
continue to be adjusted as repeated heavy rainfalls through last
weekend added to the expected river cresting levels and triggered
still more levee failures. Aside from extensive crop losses on the
flooded acreage, yields elsewhere in the water-logged areas remain
vulnerable to ponding, inadequate fertilization and weed control,
and the possibility of being hit by frost before reaching maturity.
Flooding continues to cause bottlenecks in the transportation network. Fortunately, water levels on the upper Mississippi have recently retreated, even falling below flood stage for most areas north of Davenport, Iowa. Several locks on this portion of the River have reopened, permitting local barge movements of grain, coal, and fertilizer. However, the long-haul barge shipments needed to help replenish grain stocks at the critical Gulf Port terminals still await the reopening of locks around the St. Louis area. Some observers believe it will take 10 days of no rain before commercial barge traffic in that area can resume.