December 8, 1993
Summary
Seventh District economic expansion gathered increased momentum in
recent months. Retail sales growth seemed to strengthen in October
and November, and sales results for the Thanksgiving weekend
generally met or exceeded retailers expectations. Manufacturing
activity strengthened further, as auto output climbed back toward
previously scheduled levels and as production gains spread to a
wider range of industries. The pickup in business activity has
bolstered labor markets in the region, after the employment recovery
faltered earlier in 1993. A survey indicated that loan standards and
terms at the largest District banks remained on a modest easing
trend, although only a bare majority reported increased demand for
commercial and industrial loans. Our latest survey of agricultural
bankers indicated that land values generally remained stable this
summer, although banks in flooded areas expressed some concern about
farm earnings and loan repayment rates. Reports of price increases
became somewhat more prominent in recent months, but many of them
seemed concentrated in basic materials responding to market-specific
developments.
Retail Sales
Survey data and reports from individual firms indicate that retail
sales growth strengthened in the District in October and November. A
nationwide survey indicated that Midwest retailers expect modestly
stronger holiday season sales gains than the national average. A
survey of retailers in Michigan indicated that expectations for
holiday season sales were running in line with those held at the
same time last year, which were appreciably higher than expectations
in 1988 through 1991. A survey of retailers in the Chicago
metropolitan area showed an improving trend in same-store sales
growth in recent months. A large retail chain reported that sales
continued to strengthen "along a steady uptrend" through October,
and sales gains then gathered greater momentum in the first two
weeks of November, with further relative strength in sales of
furniture and appliances. A large distributor of appliances reported
that retail demand softened modestly in early November, but only
from record levels, and demand strengthened anew in the latter half
of November. One of the largest auto dealers in the District stated
that inventory shortages constrained sales gains during the third
quarter, but margins improved as underlying consumer demand remained
relatively strong. The shortages eased in October and November,
however, and sales picked up further from already-active levels.
Surveys and reports from retailers indicated that retail sales and traffic generally met or exceeded expectations over the Thanksgiving holiday weekend, despite difficult weather around much of the District. For example, a large department store chain stated that "we were very pleased" with sales over the weekend, with sales exceeding projections. A check authorization firm reported a 5 percent year-over-year increase in day-after-Thanksgiving sales in the Chicago area.
Manufacturing
Seventh District industrial output strengthened in recent months,
particularly as auto production climbed back toward scheduled
levels. Purchasing managers' surveys in Chicago, Milwaukee, Detroit,
and Western Michigan generally indicated an improving pace of
activity. Auto industry suppliers provided the initial boost to the
improvement seen in these surveys late in the third quarter, but the
most recent reports showed production gains spreading to a wider
variety of manufacturers. A steel industry analyst reported that
integrated mills are still completely booked for the fourth quarter,
and bookings are extended further into 1994 than is normal for this
time of the year. A manufacturer of corrugated paper containers
reported that its overall orders growth strengthened in recent
months, particularly from firms in appliance, auto, and printing-
related industries. A large manufacturer of consumer durable goods
reported that dealer orders posted significant year-over-year gains
in November. A manufacturer of gypsum wallboard stated that two
large plants were brought back on-line in the industry in October to
meet strong demand. A large diversified manufacturer reported
continuing weakness in several important overseas markets.
Employment
The recent pickup in overall business activity has bolstered
employment gains in the District, following a loss of momentum
earlier in 1993. A survey by a large personnel services company
found significant improvement in hiring plans among Midwest
businesses during the fourth quarter, with renewed relative strength
indicated for the region, driven in part by responses from
manufacturers of durable goods. The employment components of
District purchasing managers' surveys generally drifted higher in
recent months. Temporary help firms specializing in clerical
personnel reported a higher pace of permanent hiring by client firms
in recent months. A contingency-based executive search firm stated
that permanent placements were improving in the fourth quarter. A
firm engaged in residential reconstruction in high-end markets,
where a recovery had lagged economic recovery as a whole, stated
that "We're swamped. We're also hiring, something we haven't done
for a year and a half."
Banking
A recent survey of loan officers in the District indicated that
standards for approving applications for commercial and industrial
loans generally continued to ease among large District banks, while
a modest majority of surveyed banks reported improvement in
commercial and industrial loan demand. Most respondents indicated
that standards for commercial real estate loans remained
restrictive, although some banks did report selectively easing their
standards for approving applications for construction and land
development loans. One middle-market lender stated that much of the
increase in commercial and industrial bank lending activity has
resulted from a fight for market share, with little new net lending
growth in the aggregate. Another bank stated that loan demand from
large commercial accounts remained relatively weak in recent months,
citing continued competition from alternative financing channels and
a slower-than-normal cyclical recovery in requirements for inventory
financing.
Agriculture
The fall harvest is nearly complete. Crops in many areas were
confronted with sizable drying charges and price discounts for low
quality. Yields were down in general, but varied widely across the
District. State average corn and soybean yields in Iowa -- the state
hardest-hit by the flood -- dropped to levels comparable to those in
the drought-disaster of 1988. At the other extreme, soybean yields
in Illinois and Indiana reached new highs.
Our latest survey of agricultural bankers found that District farmland values were stable this summer, in general, and up about 3 percent from a year ago. The bankers' views on credit conditions varied widely, however, with most of the difference seemingly tied to the extent of crop damage from the summer floods. Bankers in the harder-hit states of Iowa and Wisconsin are concerned about farm earnings and loan repayment rates, while bankers elsewhere in the District generally expect earnings and loan repayment rates to match or exceed year-earlier levels.
Prices
Reports of price increases became somewhat more prominent in recent
months, but they were often restricted to basic material prices
reacting to market-specific developments. A steel industry analyst
stated that scrap prices have appreciated over 35 percent this year,
partly because of hedging prior to a strike deadline, but mainly as
a result of stronger underlying demand. A manufacturer of paper
containers expected an industry-wide price hike to hold firm in
coming months, after flat-to-modestly-declining prices accompanied
sporadic and unsuccessful attempts at price increases over the past
three years. A manufacturer of gypsum wallboard reported that
another price increase was announced in its industry. This contact
also noted that paper used to cover wallboard was in short supply.
District retailing contacts generally reported that competitive
pressures continue to constrain price increases. One large retailer
noted that "customers are shopping with a purpose," during the
holiday season, with a greater share of traffic using lists and
comparison shopping. A large distributor of paint sold for
commercial construction purposes reported that competition continued
to drive down prices in its markets, despite improvement in demand.