May 2, 1990
Summary
Contacts in the Seventh District continue to report generally
improving business conditions, although areas of weakness were also
cited. Purchasing agents' surveys indicate a rise in production, but
orders are slowing in some areas of the District. Contacts in the
manufacturing sector report slow but steady gains over a wide range
of products. Construction activity remains stronger in the District
than nationwide, but the housing market is showing signs of
softening. Consumer spending has been holding up well in recent
months, but sales for one large retailer were unexpectedly weak in
early April.
Surveys of purchasing managers in the District showed improvements in production, but a mixed pattern in orders. Chicago's survey indicated a steady increase in the number of firms expanding production since the beginning of the year. Firms receiving more new orders also outnumbered firms receiving fewer new orders. Both Milwaukee's and Indianapolis' survey showed expanding production last quarter. However, in the March survey Milwaukee had the number of firms with lower production equaling the number with higher production. Similarly, after indicating increasing orders in January and February, Milwaukee's March survey indicated that the number of firms receiving fewer new orders outnumbered the firms receiving more new orders. Indianapolis' and Detroit's survey also showed declining orders in the first quarter.
Manufacturing
A number of contacts indicated that manufacturing activity continues
to make modest gains. Improvements among consumer goods producers
are being led by the auto industry. Although domestic car production
in the second quarter is expected to be about 10 percent below its
year-ago level, a recent survey of auto makers indicated that car
production this quarter is expected to be 20 percent above the first
quarter. One auto maker extended the temporary shutdown of an
assembly plant in the District by one week in early April because of
slow car sales. However, all auto facilities are scheduled to be
operating by the last week of April, with some working overtime. An
economist for the steel industry reported that orders have been
"flooding in" from the auto industry, although the orders have had
longer lead times. Steel shipments in the second quarter are
expected to be about equal to a year ago.
Capital goods producers generally reported improving orders and sales. A producer of a wide range of capital goods noted that sales began to improve in February and orders have been strengthening since the beginning of the year, led by petroleum equipment and food machinery. Other special industry machinery orders were up slightly, with the exception of automotive service equipment which has been weak for over six months. An economist in the communications equipment industry cited an increase in orders across a variety of products and expects double-digit growth in the near future. An uptick in orders for electronic components, however, may be due to fears of shortages, which have led to double ordering, according to an industry analyst. Sales of farm and construction equipment continue to be extremely good, according to a industry economist. Farm equipment sales are very strong, particularly combines and large tractors. Construction equipment sales have also been holding up, despite sluggish housing and shopping center construction nationally. The economist noted that sales in that company's Midwest market have been showing solid gains.
Construction and Real Estate
Construction activity in the District continues to outpace the
nation, as unseasonably warm weather boosted residential and
nonresidential building. A supplier of building materials reported
that year-to-date shipments to District states are up, compared to a
drop for the nation as a whole. Similarly, an analyst in the cement
industry noted that cement shipments to the District have grown
substantially faster than nationally, with the exception of flatness
in sales to Michigan, which was attributed to the weakness in the
state's auto industry.
Several contacts cited special factors that may be hampering construction. A financial analyst stated that builders are in need of new sources of loans, because savings and loan institutions are "out of the market." A steel producer noted some slowing in orders from the construction industry that may reflect delays in projects due to financing problems. And, an equipment supplier also noted that some plant construction, particularly in the chemical industry, is being held back until environmental regulations are finalized.
The housing market is showing some signs of weakening. A bank economist cited a softening in Chicago's real estate loan market, especially for mid-to-high priced homes. Mortgage rates have moved above 10 percent at most lending institutions in the area and some banks have started tightening credit terms. Available funds for new construction are being absorbed mostly by single-family housing units, with few funds going to multi-family units, according to one financial analyst. A supplier to the mobile home industry reported sharp sales declines in most regions of the country, including the District. However, one bank economist noted that housing prices in the District have risen more closely in line with personal income than in other regions, which has contributed to a stronger housing market here than in the nation on average.
Consumer Spending
Recent patterns in general merchandise sales are difficult to
interpret because of atypical weather and a late Easter, but several
contacts indicated year-over-year sales gains in recent months. An
economist for a major department store chain reported steady
improvements through early April in their seasonally adjusted weekly
sales figures, led by electronic goods and appliances. These sales
gains occurred without special promotions. Sales declined, however,
for women's accessories, men's clothing, and lawn and garden
supplies. Sales have been strongest in Wisconsin and Illinois, and
declined in Michigan. An analyst for a major discount chain reported
that sales in February and March were the best for that period since
1983, with double-digit gains in all types of electronics. However,
overall sales in the first full week of April unexpectedly declined
from a year ago, even after adjusting for differences in the Easter
selling season and despite the fact that store traffic remained
relatively high. Domestic car and truck sales in the early part of
April were down from a year ago. An industry economist, who had
expected that first quarter sales would be strong enough to end the
need for sales incentives, now sees promotional activity continuing
through the second quarter.
Banking
Isolated reports of tighter credit standards were obtained from
several lending officers in the District. With respect to commercial
and industrial loans, the only report of credit tightening related
to loan requests involving borrowing institutions that are highly
leveraged. Demand from leveraged borrowers has fluctuated widely in
recent weeks. No lending officer stated, however, that their
institution had directly altered credit standards. Other business
traffic was reported by a major Chicago lending institution to be
"routine." One respondent indicated that, in response to his bank's
apparent concern over loan quality, the borrower was being asked for
more loan documentation. This respondent indicated that the bank was
now asking the borrower for what purpose were the funds to be used.
Another respondent said that troubled loans were not being carried
as long by banks. This respondent also noted that there was an
increasing array of new sources of credit available to the small
business borrowers. The general impression conveyed by several
respondents was that funds were adequately available to good
borrowers.