August 9, 1995
Summary
District economic growth increased in June and early July. Consumer
spending and housing activity remained on the higher growth path
that developed late in the second quarter. Manufacturing output
flattened out on a seasonally adjusted basis, following a
significant deceleration centered in consumer durable goods
production earlier in the year. Manufacturing inventory contraction
abated, but many producers remain wary about inventory levels.
District employment growth has slowed during 1995, but labor
shortages have been partly responsible. Labor markets remain tight
in many areas of the region. Crop prices have risen sharply, as
yield concerns for the 1995 harvest added to earlier pressures from
strong consumption and a cut in seeded grain acreage. Industrial
input price increases continued to moderate, however, and prices
have actually declined for some important industrial materials.
Retail Sales
Reports from retailing contacts suggest that District consumption
growth remained on the higher plane that developed late in the
second quarter. A survey of retailers in Michigan suggested that
sales growth increased on a seasonally adjusted basis in May and
June, led by sales of durable goods, while optimism about future
sales gains remained high. Two large department store chains
reported stronger apparel sales growth than earlier in the year. One
large retailer stated that sales growth in June was boosted by an
easier year-over-year comparison, but the gain was still stronger
than earlier in the year, and durable goods sales continued to lead
overall gains in early July. A large bank stated that revolving
credit rose quite strongly in recent months, with particularly
strong gains noted in spending on home electronics. Appliance and
electronic firms agreed that computers and communications equipment
continued to take a growing share of consumption spending. A large
consumer goods manufacturer reported that sales of traditional
television sets have remained relatively flat this year, but sales
of large-screen TVs are "still going gangbusters," with unit sales
growth in excess of 30 percent. An auto industry analyst estimated
that the net effect of rising lease expirations on new vehicle
sales has been increasingly positive in 1994 and 1995. Most surveyed
auto dealers stated that the leasing option continued to promote new
vehicle sales, on balance, thus far this year. Lease renewal rates
have been holding steady during 1995, according to one large
automaker.
Housing Construction
Existing home sales in the region strengthened significantly during
June and July on a seasonally adjusted basis. Residential
construction remained relatively flat, but homebuilder optimism
continued to improve. A number of realtors' associations noted that
sales gains improved in June and July, after weakening in the
spring. One of the largest realtors in the region
characterized existing home sales market as "very active" in June,
with transactions "unusually strong." Another large realtor stated
that "up until May, things were kind of slow. Since May 1, however,
we've seen a dramatic turn upward." This firm posted sales records
in May and June, and stated that "at this point in July, things look
very, very strong." Banks reported that residential mortgage
applications increased considerably in recent weeks, both for new
mortgages and refinancing, and one bank stated that it had a large
backlog of unprocessed applications. Industrial construction
activity continued to grow at a brisk pace, and a number of contacts
stated that contractors in the Chicago area were "fully booked" for
1995.
Manufacturing
District manufacturing output stabilized in June and July on a
seasonally adjusted basis. The composite index for purchasing
managers' surveys in Chicago, Detroit, and Milwaukee pointed to a
significant slowdown in District industrial output in the second
quarter. This index remained stronger than the national average,
however, and both the Chicago and Milwaukee survey indexes firmed up
in July. District steel production tended down along a normal
seasonal pastern in the first three weeks of July, after declining
on a seasonally adjusted basis in the three months ended in June. An
industry analyst reported that order books for the third quarter
have been filling up in recent weeks, and output in July is expected
to be the low for the third quarter on a seasonally adjusted basis.
However, this contact expected industry inventory to continue to
decline in the third quarter. Most of the recent inventory trimming
was concentrated in sheet products related to auto and appliance
production. Demand for structural and plate steel used in
construction applications and heavy equipment remained strong.
Auto and appliance output firmed up on a seasonally adjusted basis, but have yet to post any significant rebound in spite of reports of great retail sales growth. Light vehicle deliveries strengthened in June and early July, and some industry analysts even expected auto output to increase slightly in the third quarter. Heavy-duty truck order cancellations rose considerably in recent months however, and build plans imply a decline in assemblies by the end of the year. Factory shipments of major appliances weakened slightly on a seasonally adjusted basis during late June and the first two weeks of July, after strengthening in May and early June. Factory inventories of appliances fell sharply in June, and then flattened out in recent weeks. Reports from heavy machinery manufacturers remained relatively upbeat. For example, a construction industry analyst reported that unit sales of new equipment rose sharply in the latest reporting period (May). Year-to-date, this contact reported that sales in the Midwest posted the largest year-over-year increase in the nation, despite especially adverse weather earlier in the year. An air cargo firm focused on construction equipment and parts stated that "we had a huge June, and expect July and August to be just as strong."
Labor Markets
Employment growth has slowed along with the overall District
economy, but labor markets remain relatively tight and shortages
continue to constrain growth in pans of the region. The employment
component of purchasing managers surveys firmed up in recent months,
after falling with the production indexes earlier in the year. A
large daily newspaper reported that year-over-year gains in help-
wanted advertising inches have been narrowing in recent months, but
they remain high and showed a significantly stronger year-over-year
gain in late July than for the year-to-date. Summarizing the
results of a survey of Wisconsin employers, a regional analyst
stated that labor shortages were likely to constrain growth in that
state over the next five years. Manufacturing and services firms
have reported continuing increases in entry-level salaries this
year. One large bark has raised entry-level wages three times thus
far in 1995, and has increased benefits paid to part-time workers.
Agriculture
Crop prices have risen sharply this summer as yield concerns for the
1995 harvest have added to earlier pressures from strong consumption
and a cut in seeded grain acreage. Crop conditions vary across
District states, with ratings better-than-normal in northern areas
and lower-than-normal in southern areas. However, compared to the
extraordinarily high per-acre yields of last year, even normal
yields in 1995 will translate into a sizable decline. Crops
weathered a mid-July heat wave reasonably well, but abnormally high
livestock losses were reported in a few localized areas. Overall,
livestock marketings and milk production continue above the record
pace of a year ago but a downturn in pork production is likely this
fall. The scaling back in pork production is more evident in
District states as production continues to expand in a few other
fast-growing areas.
Prices
Industrial input price increases continued to decelerate. The price
component of the Chicago purchasing managers survey dropped
significantly in July, to a level consistent with only modest
increases in industrial input prices. Spot steel prices have been
declining, mainly for sheet products, and an industry analyst stated
that a scheduled July 1 price increase failed to materialize (in
fact, there was a decline). Plastic resin prices stabilized in July,
after weakening in June. Although prices charged by resin producers
were largely unchanged in June, an industry analyst stated that
prices charged by distributors fell, and producers turned away sales
at lower prices and suggested customers contact distributors. A
large air cargo firm stated that emergency orders and premium
pricing associated with shortages have fallen off this year, even as
orders strengthened overall in June and July.