January 19, 1994
Summary
Economic expansion in the Seventh District continued to run at about
the same pace as the fourth quarter as a whole, while firms' and
households' confidence in future growth improved. District retailers
generally enjoyed moderate sales gains in the holiday season, with
most reports indicating sales gains in line with expectations.
Retail sales growth in the District seems to have proceeded somewhat
faster than in the nation as a whole, and several large retailers
reported unchanged to somewhat stronger sales gains in early
January. Manufacturing activity continued to expand at a relatively
robust pace, led by auto production. Corn and soybean prices rose
sharply in recent weeks, reflecting expectations that harvest
estimates will be revised downward even further. The consensus
forecast of 33 Midwest economists called for real GDP growth to run
at about the same pace in 1994 as in 1993. with continued above-average growth in most durable goods sectors where Midwest
production is relatively concentrated.
Retail Sales
Retail sales generally grew at a moderate pace in the holiday season
that was in line with District retailers' expectations, and several
large chains stated that their sales growth was little changed or
somewhat stronger in the post-holiday period on a seasonally
adjusted basis. A number of surveys prior to the holiday indicated
that District retailers expected somewhat stronger gains than the
national average, and post-holiday results did point to relative
strength in sales growth in the region. A review of credit card
purchases by a retailers' association in Michigan indicated that
credit sales rose over 14 percent from 1992 for surveyed firms on a
same-store basis. A study by a check authorization firm indicated
similar growth in sales paid with checks, which ranged from 6 to 15
percent among District states. This study indicated that sales
growth in the region exceeded the national average, and strengthened
late in the holiday season. A group of retailers in Central Michigan
reported same-store sales gains averaging roughly 7 percent over a
surprisingly strong year-earlier period, although results were
somewhat below the optimistic end of expectations. An association of
restaurants in the District reported that its members enjoyed robust
sales gains during the holiday season.
Discussions with individual retail firms were largely consistent with the picture painted by survey data, and several large retailers indicated that moderate sales growth continued in early January. One large chain that reported relatively strong holiday sales gains stated that sales growth strengthened, if anything, in late December and early January. Another large chain reported that sales growth increased significantly in early January, with sales gains in the District running in line with the national average. Bigger-ticket items (including housewares and electronics) continued to lead overall sales, and hard-line inventories were running below plan for the first time in several months. This contact noted that post- holiday season promotional activity was somewhat stronger than last year, but did not express a great deal of concern in light of the surprisingly strong sales pace in the holiday season for 1992. Retail prices continue to rise slowly at best, and most firms indicated that competitive pressures on margins were little changed, including those that enjoyed relatively successful seasons. With the dramatic exception of Rose Bowl items sold in Wisconsin, reports generally indicated that apparel sales remained relatively weak. One department store chain stated that a shift in sales mix would constrain its overall margin relative to last year, but consumers seem to have extended their purchases beyond the basics within low- margin categories to a greater extent than they did in the 1992 holiday season.
Manufacturing
Purchasing managers surveys and reports from District contacts
generally indicated moderate to relatively robust gains an
manufacturing activity. The overall index for the Chicago purchasing
managers survey flattened out in December, but for the fourth
quarter the index average was at its highest level since 1988.
Surveys conducted in Western Michigan indicated that growth in
December proceeded in line with--or perhaps slightly faster than--
the significant pace experienced in October and November. The price
component of these surveys offered scant evidence of significant
price pressures overall, although expectations firmed that announced
steel price increases would hold, and several respondents reported
that finding qualified production workers and tradespeople was
becoming increasingly difficult. The prices-paid component of the
Chicago survey actually declined during the second half of 1993.
falling well below year-earlier levels. The overall index for the
Detroit purchasing managers' survey strengthened significantly in
December (from already high levels), and supply shortages and price
pressures were reported somewhat more frequently in this survey than
in others around the District.
Reports from individual manufacturing firms generally reflected a rising note of optimism about prospects in the new year, although growth was expected to moderate in several durable goods markets following strong gains in 1993. A large steelmaker noted that space on order books is on an allocation basis into the second quarter of 1994, and the auto industry remained its strongest market. A machine tool manufacturer reported continuing strength in orders from automakers and their suppliers, but stated that overall industry orders growth should slow somewhat in 1994 after a strong year in 1993. Pricing and margins remain under considerable pressure from European and Japanese machine tool producers with underutilized capacity. Heavy-duty truck orders strengthened further, according to an industry analyst. This contact stated that many industry suppliers are "stretched to their limits." A manufacturer of fluid power equipment expected further gains in output of construction machinery and other forms of heavy equipment.
Agriculture
Corn and soybean prices have risen sharply in recent weeks,
reflecting analysts' expectations that the final estimates of the
1993 harvest will show further downward revisions. A near 20 percent
rise since early November has pushed corn prices to the highest
levels in ten years, reaching levels roughly 40 percent higher than
a year ago. The higher prices are helping to buoy the earnings of
crop farmers who were able to avoid the brunt of the flood losses
last summer. Alternatively, the higher crop prices translate into
sharply higher feed costs for livestock and dairy farmers. The
latter is apparently contributing to a downturn in livestock
production, at least in District states. Similarly, milk production
on dairy farms in the District in recent months has lagged year-
earlier levels by nearly 6.5 percent.
Expectations for 1994
The consensus forecast of 33 economists attending the Chicago Fed's
annual economic outlook conference called for real GDP to grow 2.9
percent on a year-over-year basis in 1994, with little change in the
inflation rate (as measured by the CPI) and only a negligible
increase in the prime rate. Business fixed investment was
anticipated to continue to rise faster than overall GDP, but growth
was still expected to slow somewhat from its robust pace in 1993.