January 18, 1995
Summary
The District economy expanded at a moderate to vigorous pace in
recent months. The underlying momentum in retail sales growth
remained strong during the holiday season, and probably exceeded its
third quarter pace on a seasonally adjusted basis. Manufacturing
activity remained robust for the time of year. Labor markets
continued to strengthen, with little sign of softening in employers'
hiring intentions heading into the new year. Transaction price
increases seem to remain centered in basic materials and
intermediate goods, as retailers continued to stress intense
competitive constraints on pricing.
Retailing
The underlying trend in retail sales growth remained quite strong
during the holiday season. Sales gains reported by large retail
chains were generally in line with or somewhat better than pre-
season expectations, except for apparel sales, where relatively warm
weather held back sales prior to the last week of December. Apparel
retailers blamed shifts in consumption toward hard goods, and not
weakness in total consumption, for their relative sales weakness.
Apparel sales have strengthened in early January, but as one
retailer noted, "a good December is a heck of a lot better than a
good January."
Most large retailers indicated that year-over-year sales gains improved as the season matured, except in apparel sales. For example, one large durable goods retailer characterized sales in the last week of the season as "booming," with sales gains running well ahead of previous weeks. A number or retail chains indicated that toy sales gains were in line with or stronger than companywide averages, and home entertainment software and computers were among the strongest gift-giving categories.
Excluding apparel sales, most large retailers reported better overall sales gains in the District than their national average. A late December survey by an accounting firm suggested that Midwest consumers had higher planned and actual spending levels than consumers in any other major Census region. Large prospective and actual bonuses in the auto industry boosted retail sales in Detroit and other areas of the District.
The District has experienced large-scale expansion in retailing capacity in recent years. As a result, survey data, reported same- store sales gains, and anecdotal evidence on individual store chain results may well understate the strength of aggregate sales growth. Increased retailing capacity also helps explain why discounting ran more aggressively than many retailers anticipated at the onset of the 1994 season, in spite of strong demand and customer traffic. The strongest holiday sales gains seem to have arisen in products where prices have been declining (such as computers and electronics) and in outlets where prices are relatively low. Several retailing analysts suggested that discount stores took a larger share of holiday sales growth in the region during 1994, as consumers turned more aggressive in their search efforts alter a less-cautious shopping season in 1993. One large outlet mall characterized its holiday sales season as "awesome." Customer traffic was up nearly 30 percent based on vehicle counts, and the number of motor coach trips to the mall were up 36 percent. Separately, this contact noted that charitable gift giving rose markedly from 1993.
Manufacturing
District manufacturing activity remained robust as the year came to
a close. The composite production index for purchasing managers'
surveys in Milwaukee, Detroit and Chicago has eased back from
especially high levels in the second quarter of 1994, but in
December still remained at a level consistent with vigorous growth
in District industrial output. A similar trend was evident in
surveys conducted in Western Michigan. Reflecting continued gains in
durable and capital goods output, District steel production posted
relatively sharp increases in October, November and December, in
contrast to a normal seasonal slowing.
A large automaker stated that dealer orders and showroom traffic remained stable or even picked up a little around the industry in recent months, on a seasonally adjusted basis. A large steelmaker stated that first quarter production plans were recently raised in response to modestly higher auto industry demand than originally anticipated. An association or machining shops reported that production continued to trend higher in recent months, with machine tool purchases among its membership surging since the industry trade show in September. One machine cool manufacturer stated that customers' capacity expansion projects accounted for a greater share of orders growth in recent months, joining continued gains in orders for tools designed more closely for productivity improvement.
Labor Markets
District labor markets continued to tighten up, and there was little
sign of softening in employer hiring intentions entering the new
year. A substantial number of retailers expressed difficulty meeting
seasonal labor needs during the holiday season, although this
experience was not universal. An association of machining companies
stated that skilled worker shortages continue to raise production
bottlenecks, although they haven't intensified greatly since mid-
1994. In some cases these shortages have even prompted capital
spending delays, as firms postpone the delivery of needed equipment
because workers aren't available to operate the machinery. Staffing
services firms have suggested that labor shortages and associated
wage pressures are more closely concentrated in blue-collar than
white collar labor. Separate surveys by two compensation consulting
companies suggested that salary increases in large firms during 1995
will remain in line with 1994, on average, but variable pay
(contingent on sales growth, profitability, customer service or
other goals) will continue to take an increased share of total
compensation.
Agriculture
Hog production during the fall months was up only marginally from
the year before and well short of expectations. Moreover, producers
have made sizable cuts in both the inventory of foundation stock and
in the intended number of litters to be farrowed this winter. As a
result, analysts now believe the gains in pork supplies will end
early in the second half. Production cuts have been especially
apparent in this District, which normally accounts for about half of
all hogs raised nationwide.
Prices
Price increases seem to remain centered in basic materials and
intermediate goods, as retailers continued to stress intense
competitive constraints on pricing. A number of large retailers
indicated that holiday season discounting and promotional activity
were more aggressive than expected a few months ago. Inflationary
expectations continued to rise in the industrial sector, however.
The price components of District purchasing managers' surveys
climbed further in recent months, pointing to faster industrial
price inflation even as output growth slowed a little from its
extremely rapid pace earlier in 1994. The price component of the
Chicago survey has climbed steadily this year, but remains below
levels during the late 1980s. The price component of the Detroit
survey has depicted higher price increases for most of the last
year, and in December climbed to its highest level since late 1987.
A large share of respondents to surveys in Western Michigan
continued to express frustration with shortages and lengthy lead
times. Looking ahead, another regular survey of District businesses
showed a significant increase in the share of respondents expecting
higher inflation. When asked to name the most serious threat to 1995
business conditions, rising interest rates and rising inflation were
the most frequently mentioned factors in this survey.