March 13, 1996
Summary
Economic activity in the Seventh District remained at
relatively high levels in January and February, although growth
remained slow and was uneven across sectors and sub-regions. Despite
adverse weather in February, retail sales improved somewhat from a
soft January. Housing and construction activity remained relatively
strong in the District, buoyed by a pickup in first and second-time
home buyers. Manufacturing and banking activity, however, has become
increasingly mixed since the beginning of the year. Job creation in
the District continued to outperform the nation as a whole in early
1996 and labor markets remained very tight, while increases in wages
and prices remained subdued.
Retail sales
Retail sales were generally described as soft in
February, but better than January. Several large retail chains
reported that February sales for their Midwest stores were slightly
above the company-wide average, with one retailer showing the region
as its second strongest market. Sales of durable goods and
electronics are still leading other market segments, although one
large retailer cited a shift toward soft goods, particularly in
women's apparel. A general manager at a Chicago area shopping mall
stated that their retailers were still experiencing double-digit
growth in sales, but felt that their stores' sales were better than
the regional average. Weather conditions in February slowed sales in
the region and, in some cases, led to some stores being temporarily
closed. A survey of small independent retailers in Michigan showed
that retail sales continued to be slow in January, but retailers'
optimism for the spring season remains high. A recent report also
showed that supermarket sales in both the Chicago and Detroit areas
were growing faster than for the nation as a whole over the last two
quarters. A consumer finance company reported an increase in
consumer bankruptcies, but consumers in the District appear to be in
better financial shape than those in other regions of the country.
Several auto dealerships reported that sales had been improving over
the last several weeks, but a dealer noted that used car sales had
softened.
Housing/Construction
Housing and construction activity remained
relatively strong during January and February despite severe winter
weather. Realtors and bankers across the District reported that
sales of existing homes in January were up considerably in year-
over-year comparisons and that this trend had carried over into
February. Homebuilders also reported that sales of new dwellings
were up markedly from January last year, and a national survey
showed both increased traffic and sales in the Midwest region for
February. Several contacts attribute the continued high demand for
housing to strength in the labor markets and low mortgage interest
rates. Sales have been strong in lower and medium-priced homes, led
by first and second-time buyers; sales at the upper end have been
slow for several months. Several contacts reported that industrial
real estate demand was quite strong in early 1996 and prospects for
construction opportunities were increasing. Capacity utilization at
factories that supply materials to the construction industry
remained at historically high levels in January and February, but
growth appears to be flat. One cement producer in the District
reported that the industry continues to add capacity in expectation
of increased public construction and steady demand from residential
construction. Despite continued high demand, sources reported that
prices remain in check at both the producer and consumer levels.
Manufacturing Activity
Manufacturing activity in the District was
mixed in February. Purchasing managers' surveys from around the
District varied, with the Chicago area showing contractions among
the its key components (including prices) and Milwaukee continuing
to show fairly solid expansion. A diversified producer of equipment
and basic materials reported that machinery orders and backlogs in
January generally were up from a year ago, but food machinery orders
have been weak and signs of weakness are emerging in chemical
markets. Several auto suppliers reported that sales were down in
January and February, but one supplier attributed part of the
weakness to its strong sales in December and noted that it was
expanding capacity to support expected orders over the rest of the
year. After a sharp decline in December, an appliance industry
analyst noted that sales in January were flat year-over-year, with
small appliances accounting for much of the recent slowing. A heavy
construction equipment producer indicated that sales through
February were about in line with an expected slowdown that has been
underway since mid-1995. Several steel producers, however, reported
orders for both sheet and structural steels to be quite strong, with
one mill receiving orders at a rate 10% above its capacity through
the second quarter.
Banking
Banks generally reported that the level of lending was
quite strong, but the patterns of growth varied by location and
market segment. A large bank in the Chicago area reported that loan
demand was still increasing across most market segments. Several
Michigan banks described lending activity as strong, but C&I lending
(especially to auto suppliers) was off from peak levels last year.
Also, global and large corporate markets were strong, while middle
markets have slowed since January. However, a western Illinois bank
reported strong growth in total loan demand, with its commercial and
consumer loan volume up significantly. Most banks indicated that
mortgage lending was increasing, although as much as one-half or
more of the activity was in refinancing. Several banks cited lending
to retailers as their only weak market, with several small retailers
in the process of going out of business.
Labor markets
Labor markets remained tight through January and
February, although job growth appears to be less robust than the
same period last year. Labor market analysts in most of the
District's metropolitan areas detect little change in employment
numbers from late 1995 outside of normal seasonal variations,
although a downturn was evident in average weekly hours worked in
those areas dependent on durable manufacturing industries. Help-
wanted advertising ticked up in January, although it remained below
last year's high levels. A national survey of hiring plans suggested
that employers in the Midwest region were the most optimistic in the
nation for job growth heading into the second quarter of 1996, with
gains anticipated in the nondurable manufacturing, wholesale and
retail trade, and service industries. Durable manufacturers were
less optimistic about job growth in this survey. Temporary help
agencies reported that labor shortages continued to be their major
concern. Most sources reported that upward wage pressure was modest.