June 21, 1995
Summary
District economic conditions improved in May and early June, as
consumer spending strengthened and input price pressures eased in
the manufacturing sector. Inventory paring prompted retrenchment in
District industrial output growth in recent months, while capital
equipment producers' reports remained stronger than those from
manufacturers of consumer goods. Retail sales growth strengthened in
May and early June, after bad weather and some other special factors
cut into sales in March and early April. Lower mortgage interest
rates have yet to spark a widespread rebound in home sales and
construction, but they have certainly buoyed optimism in this
sector. District labor markets remained tight, but slowing growth in
labor demand eased wage pressures in some areas.
Manufacturing
Inventory paring prompted retrenchment in District industrial output
growth in recent months. Purchasing managers' surveys in the region
depicted substantial easing in production and new orders growth
during March, April, and May. In turn, the price components of these
surveys pointed to diminished input price pressures. Survey
respondents' comments and reports from other District contacts
pointed to a smoother flow of goods in the pipeline. However, even
after its recent decline, the prices-paid component of the Chicago
purchasing managers' survey remained at a relatively high level (in
line with the late 1980s).
District steel production flattened out at high levels through the early part of the second quarter, then declined relatively sharply in late May and early June -- largely due to an explosion and downtime at a large blast furnace in Gary. Orders for steel from auto and appliance producers have eased in recent months, according to a large steel producer, while other markets remain relatively strong. A large appliance manufacturer stated that shipments remain below year-earlier levels, but have improved recently. Appliance industry data suggest shipments increased slightly in April and the first four weeks of May on a seasonally adjusted basis. A large manufacturer of housing products stated that shipments are running ahead of orders, but the company is building inventory even as backlogs decline. "We think things could turn up in the latter half of the year, and we don't want to get caught short."
Capital equipment producers' reports generally remained stronger than those from manufacturers of consumer goods. A large manufacturer of machine tools characterized orders from the automotive Industry as "stable;" with no significant recent cancellations. Manufacturers of construction equipment continued to report strong sales gains. A heavy-duty truck manufacturer reported that orders fell below year-earlier levels after a stronger-than- expected first quarter, but a price increase and tighter order cancellation policies prompted some of the recent pullback. A manufacturer of industrial automation equipment reported a slight decline in orders growth in April and May, but noted that "we've still got a backlog of biblical proportions."
Retail Sales
Retail sales growth improved in the District in May and early June.
A large retailer reported a stronger sales gain during May than in
April, in spite of a more difficult year-over-year comparison. In
turn, sales gains in early June were running above May's pace.
Growth in this retailer's sales of appliances and home electronics
exceeded the company-wide average in May and June, while apparel
sales strengthened as well. Another large retailer stated that
appliance sales increased along normal seasonal trends and in line
with expectations during May, after falling below expectations in
March and April. A large superstore chain also reported faster sales
gains in May and early June than earlier in the year. Improved
weather boosted sales of seasonal items, although this contact noted
that these sales remain below targets set earlier in the year. A
large apparel retailer stated that sales growth improved in May,
particularly in areas where poor weather curtailed seasonal
improvement in spring apparel sales in March and April. "We are
cautiously optimistic," this contact noted. "We aren't optimistic,
we are cautiously optimistic." A large car rental firm stated that
business in the region strengthened significantly during May, after
adjusting for normal seasonal trends. Sales tax revenues in one
large District state posted a year-over-year increase in May twice
the rate of the increase for the year-to-date.
A majority of surveyed District auto dealers reported stronger sales in May and early June than in April, after discounting normal seasonal trends, while a slimmer majority expected sales to strengthen from the first half of the year to the second half. Most speaker presentations prepared for our recent auto industry outlook conference were cautiously optimistic, and the consensus forecast prepared for the meeting implied a small gain for new vehicle sales in the latter half of 1995.
Housing
Reports from realtors and homebuilders did not yield evidence of a
widespread upturn in housing, but lower mortgage interest rates have
certainly buoyed optimism in the sector. A minority of surveyed
realtors stated that lower rates boosted homebuying interest in
recent weeks. The latest survey conducted by a state association of
realtors showed a significant year-over-year decline in existing
home sales in the first quarter of 1995. Home sales have been
relatively stable this year, according to an association leader, and
seem to remain on an uptrend. Homebuilding permits continued to
decline in the Chicago area through April and the leader of a large
association of homebuilders stated that declining mortgage interest
rates "haven't really sparked all that much new activity, yet."
Nonetheless, most housing industry contacts still expected better
results in the latter half of the year.
Labor Markets
District labor markets remain tight, but slowing expansion in the
demand for labor may have eased wage pressures in recent months. A
survey by a large temporary help company showed a flattening out in
the rate of expansion in Midwest firms' hiring plans in the second
quarter. However, this measure remained at its highest level since
the survey began in 1977. Expansion in hiring plans among Midwest
durable goods manufacturers has abated thus far in 1995, but these
plans remained stronger than those of other Midwest employers as
well as their national counterparts. Help-wanted advertising in the
East North Central region posted an increase from the first quarter
to April. A District newspaper reported that its help-wanted
advertising section continued to expand strongly in May, albeit at a
slightly slower rate than earlier in the year. "It's still very
robust here" this contact stated. Another large newspaper reported
that help-wanted advertising revenues posted a larger increase in
May than the substantial increase for the year-to-date. An index of
help-wanted advertising slipped in Western Michigan, but remained at
a relatively high level. Several temporary help companies reported
that expansion in demand for temporary workers slowed, but remained
positive. At the same time, the supply of workers continued to
tighten. One temporary help firm stated that its placements could
grow faster were the supply of labor to increase, even if expansion
in demand were to continue to slow. Prices charged client companies
are still expected to increase, largely due to the rising expense of
attracting workers. The regional manager of one large temporary help
company stated that unfilled orders "are still running at a high
level, and we're only just starting to enter into our busy period."
Automotive-related placements slowed in Indiana, according to this
contact, but total unfilled orders are still at high levels.