November 3, 1993
Summary
Economic activity in the region picked up renewed momentum in
September and October, although gains in most sectors were modest.
Manufacturing output strengthened considerably, with most of the
improvement centered in the auto industry. Retail sales and housing
activity continued to grow, and retailers' expectations for the
holiday season were largely consistent with those reported around
mid-year. After losing some momentum earlier in the year, the
employment recovery in the District has been bolstered by the recent
revival in industrial activity. The fall harvest has proceeded at a
slower-than-normal pace, and yields on corn are proving to be lower
than earlier anticipated.
Manufacturing
District manufacturing activity strengthened in September and
October, after stalling out to a greater extent than usual during
the summer months. The production component of the Chicago
purchasing managers' survey fell off modestly in October, but only
after surging in September, and the overall index continued to climb
following an evident loss of momentum in the previous three months.
Surveys conducted in Detroit, Western Michigan, and Milwaukee also
depicted higher output growth in recent months, with auto industry
respondents accounting for much of the improvement. A large auto
supplier expected shipment gains to climb higher in the fourth
quarter and into the first quarter of 1994, particularly as OEM and
dealer inventories are "fairly skinny for this time of the year."
Production problems at a large OEM customer are lingering but are
expected to be largely resolved by the first quarter of 1994. A
manufacturer of heavy-duty trucks reported some modest weakening in
orders in September, but wasn't overly concerned in light of sizable
gains earlier in the year. This firm expected orders to remain
fairly steady at high levels into early 1994. Two large capital
goods manufacturers reported substantial year-over-year sales gains
in the third quarter, although sales actually declined on a
seasonally adjusted basis for one of these firms. Exporters in a
variety of industries reported further declines in European markets,
with one auto supplier describing output there as "completely in the
tank." Several of these firms noted that an increasing number of
European producers are pricing more aggressively in order to get
orders from the United States. A manufacturer of semiconductors
reported continuing sales gains in Europe, however, and this firm's
domestic orders growth remained at high levels in recent months. A
manufacturer of housewares reported substantially higher third
quarter earnings, and noted continued strengthening in orders during
the early stages of the fourth quarter.
Consumer Spending/Housing
Growth in retail sales and housing activity held up well compared to
manufacturing output during the summer, and little change in
consumption growth was evident in reports from District contacts in
recent weeks. Two large chains reported that their holiday season
hiring plans were in line with, or slightly stronger than, those at
the same time last year. A large discount retailer reported slow,
steady improvement in sales growth in this region, after its sales
gains had lagged the industry average earlier in the year. This firm
continued to report little generalized upward pressure on prices. A
large general merchandise chain concentrated in District markets
described sales as "pretty hard to get." Sales growth slowed earlier
in the year, and in recent months comparable store sales have been
flat on a year-over-year basis. This firm is still expecting a good
holiday season, but it has not raised inventory plans after a
reduction at mid-year. Discussions with a number of retailers in
Michigan indicated that growth in apparel sales picked up in recent
months, after slowing materially during the summer. An auto industry
contact reported that sales closure rates have remained relatively
flat during recent months, after rising during most of 1993. This
contact expected lower sales than the consensus in 1994, citing
lower expectation for pent-up demand and a ceiling on the potential
that leasing holds for future growth. Another auto industry observer
stated that sales this year have benefited from a stronger trade-in
market, after trade-ins were dampened in 1991 and 1992 by the
extension of auto loan maturities in the late 1980s. However, this
analyst expected only a marginal further boost from this effect in
1994.
A large association of homebuilders reported that gains in sales of new homes in October were running in line with the substantial increases recorded year-to-date. Citing further strength in customer traffic, this contact expected sales and starts to continue to gain momentum on a seasonally adjusted basis over coming months. Construction of individual custom homes has accounted for an above- average share of the gains in the overall market this year, according to this contact. An October survey of homebuilders indicated substantial strengthening in sales expectations One of the largest realtors in the District reported that sales in September were in line with an exceptionally strong year-earlier period, and this contact stated that the residential market remains very active for this time of year. A regional bank holding company reported that the rapid pace of residential mortgage refinancing was little changed, while demand for bank loans for new home construction is "okay, but nothing to write home about." Another banker stated that borrowers' savings from home mortgage refinancing remain targeted toward reducing the maturity of the mortgage, rather than the monthly payment, although an increasing share of younger borrowers seems to be using the savings to lower their monthly payment.
Employment
Stronger business activity in September and October helped to shore
up labor markets in the region, after the pace of the District
employment recovery slowed in the second and third quarters. Payroll
survey estimates for the District states show a weaker pattern in
1993 than they did for the comparable period last year. A survey by
a large temporary help company indicated that hiring plans among
Midwest businesses ebbed during the second and third quarters on a
seasonally adjusted basis, after surging in the latter half of 1992
and early 1993. While a majority of respondents still planned to
increase their employment levels, hiring plans among Midwest
businesses no longer exceeded the national average in the most
recent survey. A survey of small businesses in Wisconsin showed a
dropoff in hiring expectations, and a substantial majority of small
firms in a Michigan survey indicated that regulatory uncertainty was
prompting them to defer some hiring. District contacts were not
entirely downbeat, however. A variety of personnel recruiting firms
reported increased rates in recent weeks, although one contact
expressed concern whether the strengthening would prove to be
another in a series of false starts. A firm specializing in the
placement of industrial engineers stated that employers are
increasingly expecting health care reform to be a prolonged process,
and that the related uncertainty was not so serious a hiring
constraint as it had been earlier in the year. After declining in
the second and third quarters, the employment component of
purchasing managers' surveys in the District improved in September
and October. An association of metalworking companies reported a
growing shortage of skilled labor during a pickup in production in
recent months.
Agriculture
The soybean harvest in District states is progressing well, but the
corn harvest remains considerably slower than normal. Various
reports tend to suggest that the flood-related crop losses were
somewhat greater than earlier estimates indicated, especially for
corn. A large, last-minute enrollment in the 0/92 option of the
price support program resulted in more abandonment of corn acreage
than had been estimated earlier. Moreover, yields on the acreage
that will be harvested are proving so be somewhat less than
expected, in part because of frosts that hit northern portions of
the District in late September and early October.