November 2, 1994
Summary
Seventh District economic activity gained some upward momentum in
recent months, with renewed strength in retail sales joining greater
expansion in manufacturing output. Housing activity has slowed
during 1994, but remains at relatively high levels. Commercial real
estate markets strengthened further. District labor markets
continued to firm up, but concerns over job security and heightened
competition in the temporary help industry continued to dampen labor
cost pressures. Large supplies have undermined farm commodity prices
and will likely trim farm sector earnings and expenditures in the
months ahead.
Retailing
Survey data and reports from large retailers suggest that retail
sales advanced at an improved pace on a seasonally adjusted basis in
recent months. Sales growth in the District has fallen more closely
in line with the national average, but sales were relatively strong
here during 1993. A regular survey of retailers in Illinois and
northern Indiana showed some improvement in the most recent survey,
after sales comparisons weakened during the second quarter and into
the early stages of the third. A survey of independent retailers in
Michigan showed a large majority anticipating greater sales gains in
coming months.
One large national chain reported that sales growth improved in the first half of October on a seasonally adjusted basis, after some slowing in the summer. This contact noted that sales of appliances slowed around mid-year. then picked up again in recent months. Total inventories (for this retailer as well as its suppliers) are running in line with plan and moderately higher than last year. However, a higher turn rate and increased confidence in the purchasing department are expected to make the company's own inventory posture somewhat more aggressive in the months ahead. A manufacturer of consumer electronics also reported that inventory levels have been increasing, both at the company and among its dealers, even as inventory has been turning at a faster rate.
Real Estate Construction
Housing activity in the region has trended sideways in recent months
on a seasonally adjusted basis, although activity remains at
relatively high levels. Recent reports showed new slowing in permit
issuance for housing construction in Iowa (where gains held up
relatively well through the first half of the year), and slower home
sales in Illinois. One of the largest realtors in the District
reported a slight upturn in transaction volume in August and
September, after activity slowed during the second quarter and into
July. This contact still believes that sales will soften further on
a seasonally adjusted basis as the year comes to a close. Even so,
"we are still showing good numbers, and there isn't too much
grousing among the salespeople." An association of homebuilders
reported that sales and traffic continued to ease downward on a
seasonally adjusted basis. This contact stated that members'
expectations point to a further slowdown in 1995, "or perhaps some
stabilization. 1995 should still be a good year, though, and we
aren't complaining."
Commercial real estate markets continued to strengthen. A large real estate services company stated that the downtown Chicago office market "continues to move in the right direction," and the overall vacancy rate has fallen to its lowest level in over three years. This firm found stronger conditions in the suburban marketplace than the downtown area, with most of the surveyed areas showing record low vacancy rates. A large bank stated that industrial and commercial real estate markets in Chicago are showing "considerable strength, with signs of speculative activity arising for the first time in a long time." A large steel manufacturer noted that an increasing share of new construction projects seems to have a "hurry-up" quality, as firms authorize projects "and scramble to catch up" to meet tighter completion dates.
Manufacturing
District industrial output gained momentum in recent months, after
expansion slowed during the summer. Production readings from the
Chicago and Milwaukee purchasing managers' surveys remained quite
vigorous during September, and the Detroit survey showed new
strengthening. Surveys conducted in western Michigan have been
depicting some of the strongest results in the District, and these
surveys showed even greater momentum in late September.
Among key District industries, steel production moved higher on a seasonally adjusted basis in recent weeks in the region, after plant shutdowns for maintenance contributed to a greater slowdown in output than the seasonal norm late in the summer. One industry analyst stated that nearly all of the major markets for steel produced in the Midwest remain strong, including appliances, heavy equipment, and autos. This contact stated that producers' steel inventories are relatively low, partly because customers have demonstrated greater willingness to hold steel of their own accord. A large auto supplier reported that demand from transplant operations has shown recent renewed strengthening, joining continued strong sales to domestically based manufacturers. This firm expected continued moderate growth in 1995. The company has been adding capacity this year, and "only recently have we seen some stabilization in our ability to meet demand without using overtime." An association of home appliance manufacturers reported that the industry is headed for a record shipments year, topping its previous high in 1987. However, the association is expecting "some kind of a slowdown" in 1995. A number of large manufacturers noted greater momentum in exports to Europe, including producers of construction machinery, material handling equipment, and industrial automation controls.
Labor Markets
Seventh District labor markets continued to tighten, and reports of
worker shortages seemed to grow somewhat more frequent. At the same
time, few manufacturers or retailers reported significant new wage
pressures in permanent positions. A regular survey of Wisconsin
businesses showed a substantial, continuing majority planning to
increase their employment. One large manufacturer recently began
adding full-time workers to its operations in Milwaukee for the
first time since 1978. Fully 95 percent of 100 senior executives of
mid-sized companies surveyed recently in the Chicago area expect
employment to remain stable or increase further, and this percentage
has been on the rise consistently since the fourth quarter of 1993.
Help-wanted advertising in the East North Central region fell back
somewhat from July to August, according to the most recent
Conference Board index, but only after especially strong gains in
previous months, and the underlying trend continued to climb faster
than the national average. A Chicago newspaper recently moved help
wanted advertising to the front of its classified section, noting
that demand climbed especially sharply in recent months, and the
paper has increased its rates for help-wanted ad space.
A growing number of contacts reported difficulty finding skilled workers, but reports of tight labor markets are not universal, even in some of the strongest states in the District. One regional analyst stated that recent cutbacks by three significant employers in central Wisconsin have reinforced a continuing skepticism among workers that labor markets lack the strength and stability apparent in reported statistics. This contact stated that "many workers sense increased risk, and don't see a higher return." Temporary help companies have been reporting increased difficulty attracting employees for available positions, hut heightened competition in the industry has held in check the prices these companies charge the ultimate employer. One large retailer stressed that the company has experienced no abnormal price pressures arising from labor costs, with base wage increases continuing to run below the increases seen in the late 1980s and early 1990s.
Agriculture
Large supplies have undermined farm commodity prices and will likely
trim farm sector earnings and expenditures in the months ahead. The
winding down of a record-breaking fall harvest, both in this
District and nationwide, is straining grain storage and handling
facilities and pushing corn and soybean prices to the lowest levels
in several years. Likewise, livestock prices have retreated as
updated reports show the record-setting pace in meat production will
extend well into next year. Hog prices have fallen the most, down
more than a fourth from last year and the lowest in fourteen years.