May 10, 1995
Summary
Seventh District economic activity gained momentum in April, after
slowing in the first quarter, while reports of price increases grew
increasingly frequent and widespread. Retail sales and housing
activity showed signs of strengthening in March and April on a
seasonally adjusted basis. Manufacturing output continued to expand
at a moderate pace. District labor markets remained tight. Business
loan demand remained quite strong, including financing demand for
working capital, capital equipment, plant expansion, and
inventories.
Consumption/Housing
Surveys and reports from individual firms suggest that retail sales
and housing activity gained momentum in March and April in spite of
lingering cold, wet weather. A survey of Michigan retailers showed
increased sales growth in March, while optimism about future sales
gains remained high. A survey in the Chicago area indicated that
consumers' appraisals of their own financial condition improved
during the first quarter and into April, after weakening in the
fourth quarter of 1994 and into January. Retailers and
manufacturers' associations indicated that durable goods sales
growth (excluding autos) has not accelerated significantly since the
fourth quarter of 1994, but sales results for April were
encouraging, and gains from a year ago remained substantial.
New vehicle sales remained relatively slow for the time of year, according to a survey of District auto dealers, but dealer optimism remained high. Used vehicle sales continued to strengthen, particularly for late-model cars, and dealer service revenues related to "fix-or-buy" decisions were not increasing in line with what might have been expected if the new car market were fundamentally weakening. Vehicle availability has improved, and a dealer association stated that "dealers still don't want to get caught short like they did last year." Incentives declined from the fourth quarter of 1994 to the first quarter of 1995, but area auto dealers expect higher rebates as well as increased dealer incentives in May and June. Significant redesigns for half of the top 10 selling vehicles are reportedly constraining new vehicle sales. A survey of auto dealers indicated that interest rates on new car loans continued to increase in recent months.
Reports from District realtors suggest that existing home sales improved in March and April on a seasonally adjusted basis, with declining interest rates on mortgage loans playing an important role. Expectations for future sales have risen in recent months. An association of home builders stated that new home sales are still anticipated to decline slightly in 1995, after a very good year in 1994. "Builders are prepared for some slowing, however, and inventories are not especially high." Traffic quality (buyer interest, credit-worthiness) remains strong. Cement producers also expected somewhat slower growth in shipments volume, partly because of weaker-than-expected public infrastructure spending. Shipments for cement used in residential construction gained renewed momentum in the region in recent months, however, and overall shipments volume is still expected to post a new record in 1995.
Manufacturing
Purchasing managers' surveys pointed to continued but somewhat
slower growth in District industrial output in the first quarter of
1995. The Chicago survey posted a small increase in April, however,
and first quarter earnings reports for large District industrial
firms were generally stronger than many analysts expected.
Industrial power sales in the Detroit area posted a significant
increase in the first quarter (over a strong year-earlier period),
according to an electric utility, and power sales strengthened
further in April. District steel production fell back somewhat
during April after a robust first quarter, but an industry analyst
noted that an explosion and subsequent cutback at a large furnace
accounted for most of the decline. Heavy-duty truck orders climbed
to a record during March, and an industry analyst stated that order
backlog quality remains high. Unit sales of construction machinery
rose nearly 20 percent in early 1995 over a particularly strong
early-1994 period, but unit sales gains are expected to moderate as
1995 progresses. An association of appliance manufacturers noted
some slowing in shipments growth in recent months, but still
expected shipments this year to slightly exceed their record level
in 1994, as increased export shipments offset a small decline
domestically.
Labor Markets
District labor markets remained tight. A recently released survey of
job openings in the Milwaukee metropolitan area showed a sharp
increase in the share of employers characterizing job openings as
"hard to fill" in late 1994, with wage increases most clearly
evident in the lowest paying occupations. One of the survey's
organizers stated that the market continued to tighten in early
1995. A regional business analyst stated that many firms in Western
Michigan face serious labor shortages, particularly for "qualified"
workers. These shortages have curtailed expansion plans, added to
recruitment and training costs, and combined with other factors to
prompt some price increases in some industries. A staffing services
firm specializing in manufacturing occupations stated that producers
are paying higher salaries for executive positions, and
manufacturers in the Midwest are incurring higher relocation costs
with an increasing share of new workers recruited from other areas.
The distribution division of a large overseas-based manufacturer of
heavy equipment stated that the firm was not keeping up with market-
driven salary increases for field service engineers, citing margin
pressure from exchange rate changes. An industry analyst believed
that labor shortages have not yet resulted in significant wage
increases among production workers in the fragmented plastics
industry, but stated "we may be at the crux of this problem right
now."
Prices
Purchasing managers' surveys suggested that purchased material price
increases moderated in the region during early 1995. However,
reports from individual firms and manufacturers' associations
included increasingly frequent reports of price increases being
passed through into final goods prices. Price increases accounted
for a greater share of expected revenue growth in several industries
anticipating slower growth in sales volume. A construction machinery
industry analyst expressed some surprise with the number and size of
price increases in this industry in early 1995. Prices paid by
machinery dealers to manufacturers have been rising at a faster pace
than list prices, while sales terms and conditions have tightened as
well. Cement producers are running at "extremely high levels,"
according to an industry analyst, and shortages are most severe in
the Midwest. Customer dissatisfaction with shortages is high - not
because price increases cannot be passed through, but because supply
is still short and delayed, even at the higher price. Construction
contractors have been reporting raw material price increases of
about 30 percent in early 1995. An association of home builders
expressed some concern about appreciation in land prices, and
expected them to combine with labor and material cost increases to
prompt greater increases in new home price increases in the latter
half of 1995. A wide variety of paper buyers reported continuing
price increases, with one large company stating that the increases
"aren't stopping like we thought they would." Four times as many
respondents to a survey of retailers in Michigan reported higher
consumer prices in recent months as those reporting declining
prices, while virtually all surveyed stores expected prices to
increase in coming months.