October 31, 1990
Summary
The District economy continues to expand slowly, although several
contacts expressed concern about future growth. Consumer spending
still appears stronger in the Midwest than in the nation as a whole.
District manufacturing activity is rising, although several sources
reported some new weakness in export markets. Capital investment
planned for 1990 generally is being completed, but additional
caution is being expressed about spending plans for 1991. Financing
for new "speculative" construction projects has virtually ceased,
according to several District sources, while projects that have
received financing continue to move ahead. Some manufacturers have
begun attempting to raise prices to reflect higher oil costs.
Several contacts noted that buyer delinquency rates have risen
slightly.
Consumer Spending
Retail sales generally continued to be stronger in the District than
in the nation as a whole, although some problem areas persist. A
general merchandise chain reported slightly better than expected
same-store sales growth in September, and an economist for the chain
noted that spending on household durables grew faster than the
company-wide average. Sales were reportedly weak, however, in areas
of Michigan and Indiana that are linked to the auto industry. An
analyst for a national discount chain stated that company sales
experienced a year-over-year decline nationally in the first two
weeks of October, after sales growth slowed consistently (in nominal
dollars) over the five months ending in September. Traffic and sales
volume in District stores were generally stronger than the company's
national average, except in the Detroit area. Industry inventories
are being watched closely, according one retail analyst, and efforts
are being made to limit ordering to items that are out of stock.
Auto sales continue to show surprising strength, although car buyers still expect rebates. One of the largest motor vehicle dealers in the Seventh District reported continued sales growth in September and early October, with little change in mix. The dealer attributed some of the strength to aggressive promotion and market-share gains. However, heavily leveraged dealers are increasingly cautious in committing to inventory and promotions. An economist for a major domestic automaker stated that dealers continue to receive much of their inventory financing from auto producers, but are ordering cautiously. This contact also noted that there was little evidence of substitution of cars for light trucks since the oil price increase. Still, a soft economy is expected to reduce car and truck sales by about a half a million units (at a seasonally adjusted annual rate) in the fourth quarter from earlier expectations, according to this economist.
Manufacturing
District manufacturing activity continued to expand, on average,
with strength in steel, auto, and industrial equipment production
offsetting new softness seen in agricultural equipment and
electronic components production. An economist with a major Midwest
steel producer stated that industry order books for the fourth
quarter were "virtually full," with no sign of an increase in order
cancellations. While auto industry inventories are generally
considered low, an analyst stated that fourth quarter auto
production probably will be down from the relatively strong third
quarter. An economist for a manufacturer of agricultural equipment
stated that October sales continued to look "terrible," following
weakness that began in August both for the company and the industry.
However, this company's sales of industrial products in the District
rose on a year-over-year basis, as well as on a seasonally adjusted
month-to-month basis from July through September. An analyst for a
major District producer of electronic components reported that order
growth for his company's products had peaked in midsummer, and
growth is expected to continue to slow in the near future.
Area purchasing managers' surveys exhibit mixed conditions. The index produced by the Chicago area survey showed expansion in September, compared to the decline indicated by the national survey. In contrast, the Milwaukee and Detroit surveys showed weakening activity in September. One contact suggested that the Detroit weakness was due in large part to uncertainty prior to the resolution of labor negotiations between auto producers and the UAW.
Several District sources reported that exports, which have been a significant contributor to the relative strength in the Midwest economy, showed signs of softening recently. An analyst with a manufacturer of moving equipment stated that retail sales of its products outside of the United States had weakened over the past two to three months. An economist with a major manufacturer of agricultural equipment reported that overseas sales also had begun to trend downward in recent months, particularly in much of Europe. On the other hand, a large District manufacturer of equipment and supplies reported that export growth was continuing.
Investment
Capital spending plans for 1990 are generally proceeding on
schedule, although increasing uncertainty is being expressed about
plans for 1991. A major District manufacturer of machine tools
reported that the company's sales to and orders from the auto
industry remained strong through September. This contact expected
continued growth over the near-term, as domestic producers continue
retooling. Sales outside the auto industry remain relatively weak,
although the weakness developed before the onset of the Middle East
crisis. An economist for a major producer of basic materials used in
construction reported little change in the company's own project
schedules, noting that the company's largest project was, if
anything, being accelerated. However, an analyst for a large
District producer of a wide variety of capital equipment cited a
recent decline in sales, as well as a flattening in orders, for
customers producing in cyclically sensitive sectors. A bank
economist stated that customer feedback indicates that capital
projects underway are being completed, while there is some new
reluctance to commit to start-ups that begin next year.
Construction and Real Estate
A number of contacts stated that financing for new "speculative"
construction projects had virtually ceased for both commercial and
multifamily development. Many carefully researched projects continue
to move ahead, however, particularly in the food processing,
pharmaceuticals, and energy industries, as well as in public
infrastructure. An analyst with a District manufacturer of moving
equipment stated that sales to construction markets in the District
have held up well. While construction markets in the District have
been reported as generally outperforming the national average this
year, two contacts reported data for August that show this relative
strength receding, both in construction contract awards and in
cement industry sales.
A Chicago real estate agent described the local housing market as "surprisingly strong." While homes are on the market longer and prices are not rising as fast as a year ago, sellers and holding firm on price, according to the realtor, and volume is still up over last year. One large realtor reported that first-time home buyers may be more active recently, calling it a 'buyers market', in part because mortgage rates are relatively low.
Prices
District sources indicate that some manufacturers have begun trying
to increase prices in order to compensate for higher crude oil
prices. An economist for a major District manufacturer reported
increased usage of "temporary surcharges" covering transportation
costs and energy-intensive materials. An auto industry analyst
stated that it was "too early to tell" whether the oil price
increase would spread through production costs to auto prices,
noting that automakers stockpile oil and hedge their exposure to
volatility in energy costs. An analyst with a manufacturer of
agricultural machinery reported the price of its own products had
not been raised since the recent escalation in oil prices began.
This contact also stated there had been little change in the prices
of many purchased materials, principally because of weakness in the
markets for the final product.
Credit Conditions
Several contacts indicated that borrower repayments had slowed
slightly. A consumer credit analyst for a major District lender
reported a small rise in delinquency rates over the past two months,
principally in unsecured and revolving credit. This contact stated
that the rise in itself was not alarming, but noted that there
appears to be a growing proportion of consumers not accounted for in
delinquency rates because of increasing personal bankruptcy filings.
An economist with a manufacturer of farm equipment and consumer
vehicles reported a rise in delinquencies by consumers of
recreational vehicles, but little change in the delinquency rates
for buyers of agricultural and construction equipment. An analyst
for a manufacturer of moving equipment stated that delinquencies
experienced by the company's finance subsidiary had climbed since
late summer.