December 7, 1994
Summary
Seventh District economic growth remained strong in October and
November. Retail sales seemed to grow at about the same pace or
slightly higher than in previous months on a seasonally adjusted
basis; durable goods continued to lead overall sales growth, while
the tardy arrival of cold weather prompted greater strength in
seasonal apparel sales. Manufacturing activity generally remained
robust, although some durable goods producers expectations for
domestic sales gains in 1995 have been tempered in recent months.
District labor markets continued to tighten up, and reports of labor
shortages remained relatively widespread. Discussions with
retailers, manufacturers and a wide range of staffing services firms
revealed a greater frequency of reports of wage pressures in
permanent positions, albeit for a subset of occupations and
geographic areas. Reports of price increases remained concentrated
in crude goods and intermediate materials.
Retailing
Retail sales growth seemed to strengthen further in recent weeks,
after the underlying trend gathered momentum late in the third
quarter. Reports from several large retail chains and shopping malls
suggest that the holiday sales season began on a vigorous note, with
full parking lots and high sales levels. One retail association
stated that "things have been going great;" sales for the holiday
season were previously forecast to rise 6 percent, but sales gains
in the membership over the past week seem to have been significantly
above that expectation. A survey by a check processing firm showed a
stronger year-over-year same-store sales gain in the Midwest for the
day after Thanksgiving than the survey had been showing in previous
months. Several retailing contacts reported high sales levels for
seasonal durable goods like snowblowers and car batteries, after the
late-developing but harsh winter last year caught many consumers
unprepared. One large retail chain noted that apparel sales rose
significantly in recent weeks; unseasonably warm weather held back
seasonal apparel sales in October and masked stronger gains in other
apparel and home fashions lines within its overall mix. Another
large retailer reported that apparel sales remained relatively weak
in those regions of the country where warm weather continued to
linger, while apparel sales in most District states picked up with
the belated onset of colder weather. Nationally, this contact stated
that sales over the past week have been "fabulous," with year-over-
year growth well in excess of the growth for the month of November
as a whole. A continuing large majority of Michigan retailers
surveyed in November reported year-over-year sales growth, while an
even larger share of respondents expected further gains over the
next three months.
Manufacturing
District industrial activity remained robust. Production readings
from the Chicago and Milwaukee purchasing managers' surveys remained
quite vigorous during September and October, while 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
September and into late October. In November, the production
component of the Chicago survey showed faster growth than September
and October. Large automakers reported that sales closure rates
improved in recent months, after slipping during the summer.
Showroom traffic continued to run at high levels for this time of
the year, and dealer orders reportedly accelerated during October
and early November. Heavy-duty truck build plans for the fourth
quarter have been on the rise in recent months after slipping in the
third quarter. A large steel producer shipped its highest volume for
a third quarter since 1981, and total steel production in the region
showed stronger year-over-year gains in October and November than in
previous months. This steel manufacturer's materials distribution
group reported that the Midwest and the South continue to be its
strongest geographical areas. A large cement producer stated that
interest rate increases have not yet had a noticeable affect on its
own market, with residential deliveries still "doing very well, and
better than last year." A large manufacturer of gypsum wallboard
reported that industry shipments have been running at a record level
during 1994. This company expects housing starts in 1995 to run even
with 1994, but with a larger multifamily component, which use less
wallboard and could dampen overall shipments. Several durable goods
manufacturers expected slower growth in domestic markets during
1995. At the same time, a number of heavy equipment producers noted
increased sales to Europe, and these contacts expect greater export
gains to help offset slowing growth in domestic markets during 1995.
Labor Markets
District labor markets continued to tighten, and discussions with
many staffing services firms revealed a somewhat greater frequency
of reports of wage pressures for permanent positions than in
previous months. Among those staffing firms that reported little
change in compensation for permanent positions, several expected
greater pressure in early 1995. However, some staffing services
stressed that organizational restructuring and technological
advances continue to weigh on job opportunities and salaries for a
significant portion of the overall workforce. Shortages and wage
pressures seem to be centered in light industrial, construction, and
entry-level retail occupations, although one large retail chain
stated that it hasn't been any more difficult to attract seasonal
labor for the current holiday season than it was in 1992 and 1993.
Temporary help companies have been reporting wage increases for the
past several quarters, and one temporary help company stated that
"orders we used to he able to fill in two or three days, now it
takes two or three weeks." Another staffing services firm reported
that the price of help-wanted radio advertising space has risen in
recent months. An engineering firm in a robust area of the District
reported that construction has been moving at a very slow pace on
individual projects, due to the shortage of skilled labor. This
contact stated that customers of construction contractors are
bidding against one another in order to get priority for project
completions, and new contract prices are also moving higher. An auto
supplier stated that a scarcity of production workers has curbed the
firm's ability to add a third production shift, and a staffing
services firm believed that labor shortages have played a role in
auto component shortages. A number of managers of fast-food
restaurants located in relatively strong areas of the District
expressed heightened concern about labor shortages, with one busy
manager stating "I've got to get back to work, we're short two
people as I speak." While a majority of these restaurants reported
that wages have risen, none of them reported higher menu prices.
Prices
Price increases remained centered in commodities and industrial
materials. A wide range of respondents to area purchasing managers'
surveys continued to comment about shortages, capacity constraints,
demands for shorter lead times, planning difficulties for work-in-
process inventory, and higher input prices generally. In November,
the prices-paid component of the Chicago purchasing managers' survey
climbed to its highest level since late 1988. A steel consumer
expressed concern that faster growth in Europe would reduce supplies
of imported steel next year, adding further upward pressure to steel
prices. A large cement manufacturer stated that its baseline cement
prices are slated to rise roughly 6 percent at the beginning of
1995, although this represents a smaller hike than the last baseline
increase in April. Cement allocation restrictions have been
shrinking in recent months.
Evidence of greater inflation in retail prices remained relatively scarce. Most retailing contacts continued to stress that price competition remains intense, with little change in overall prices reported even among those retailers experiencing increased labor shortages and higher wages. One large retail chain stated that department stores "seem to be running a little more promotional than people might have expected a few months ago." Another large chain concentrated in apparel stated that price increases have played "no role whatsoever" in same-store sates gains in recent months. "We've had a lot of threats, but very few suppliers have really had the guts to try to put anything through."