January 23, 1991
Summary
District economic activity slowed in December and early January,
particularly as auto production fell. A consensus outlook of
business economists in the District called for a mild recession
nationally to end by the second quarter, followed by a sluggish
recovery that is held back by weak industrial production. District
retailers indicated that consumer spending over the holiday season
was somewhat stronger than the national average. Auto sales and
production remained weak in December and early January, and the
impact of slowing auto production is beginning to spread to other
manufacturers. Outside the auto industry, several capital goods
manufacturers report recent weakness in sales and orders. Export
growth continued, although several contacts with important exporting
sectors expressed concern about continued strength. Construction
spending continues on existing projects, while expectations for 1991
activity continue to be weak. Loan demand in the District has
softened. Agricultural exports fell sharply in recent months.
Outlook for the National Economy
Business economists from around the District attending a mid-
December conference at the Bank generally anticipated sluggish
growth in 1991. The consensus outlook of 25 forecasts showed real
GNP rising only 0.4 percent in 1991. The quarterly pattern indicated
by the consensus showed real GNP declining in the fourth quarter of
l990 and the first quarter of 1991. A slow recovery was expected
over the remainder of 1991, as declines in industrial production
extended into the second quarter. Citing weakening cash flow in the
nonfinancial business and farm sectors, several capital goods
producers projected absolute declines in expenditures for their
respective product categories (including office and computer
equipment). Consumer spending was expected to expand in the second
quarter at a slow pace as auto sales make a moderate rebound. In the
weeks after the meeting, reports by participants suggested that many
revised forecasts downward as new data were released, but little
change arose in the expected quarterly pattern of economic activity.
Consumer Spending
Retail sales activity generally softened through most of the fourth
quarter, but picked up toward the end of the holiday season. Most
contacts report that consumer spending in the District was still
somewhat stronger than the nation on average. Several retailers
reported that holiday sales were basically flat (in nominal dollars)
with last year, while District sales increased slightly. Some
contacts spoke of heavier-than-usual discounting toward the end of
the year, which may have boosted some retailers' sales at the
expense of earnings. Contacts generally noted increased consumer
cost-consciousness and a shift towards practicality. The best sales
performances typically were reported by discount retailers. Several
contacts reaffirmed the weakness in the Detroit area, although one
analyst stated that the warehouse club/discount format performed
well in Detroit in December, showing good volume increases. While
most contacts reported little change in the mix of sales between
credit and cash, many reported rising delinquency rates on utilized
credit.
Sales expectations for the new year are mixed, and contacts universally cited the Middle East situation as a yet-to-be resolved uncertainty. Most contacts related a belief that the consumer has been postponing discretionary purchases. However, opinions were mixed about the degree to which consumer confidence will return, should a peaceful resolution to the Middle East conflict be reached. Several business analysts in the District stated that the perception of difficulty in the banking industry has also impacted consumer confidence. Retail contacts generally indicated that orders to manufacturers are running about even with those placed at this time last year. Increased financial difficulties and inventory building in several sectors, however, may constrain total order activity in the early part of the year.
Auto Industry
The auto production slowdown continued in December and into the
first weeks of 1991, as industry sales remained weak nationally and
consumer confidence remained at recessionary levels. While Big Three
automakers attending the Bank's December meeting expect 1991 vehicle
sales to be roughly 7 percent lower than in 1990, sales rates
(seasonally adjusted) are expected to improve each quarter of the
year. Fleet sales are expected to continue to grow in importance,
lowering inventory requirements for a given sales level and holding
back a production rebound. Vehicle rental and leasing activity are
growing more rapidly than sales to individuals. Although several
dealers expressed optimism about the prospects of the "nearly-new"
car market created by the quicker turnover of auto fleets, auto
producers report concern that new car sales and production will be
adversely affected. Auto suppliers report being impacted by slower
auto production and by volatility in production schedules. Since
employees of many suppliers to Big Three automakers do not have the
income guarantees won by members of the United Auto Workers,
softness in auto-related sectors could curb District personal income
and spending growth in the near future.
Manufacturing Activity
Manufacturing activity has experienced an increasing number of
weakening sectors besides the auto industry, while some industries
remain healthy. Overall, order book quality seems increasingly
subject to the same uncertainty that is slowing consumer spending,
with many contacts reporting that capital spending decisions have
become contingent on outcomes in the Middle East. A major producer
of heavy equipment reported that sales declined sharply in December
and early January (from the year-earlier periods), while new orders
have fallen off even more dramatically than sales. The slowdown in
auto production has begun to impact the previously stable steel
industry. A large District steel producer reported that the slowdown
contributed to a sharp decline in its operating rate in late
December and early January. A major supplier to the electronics
industry reported that component sales growth was better than
expected in December. This contact expected continued growth in
1991, but at roughly half the rate in recent years. An economist for
an electric utility stated that power sales to non-automotive
industrial customers in Michigan increased in December.
Trade Activity
Several District contacts reported that expectations have weakened
for export growth continuing at recent rates, although exports still
provide some of their strongest markets. Citing slower growth in
domestic demand in Canada, much of Western Europe, and parts of
Asia, economists with two of the largest exporting firms in the
District recently lowered their forecasts for 1991 export growth.
Another large District capital goods producer stated that export
opportunities are still being developed, and that export orders are
holding up reasonably well. However, this contact expressed concern
about the potentially adverse impact on sales growth from slowing
growth in several European economies as well as political
uncertainty in the Soviet Union. Steel imports actually increased in
the fourth quarter, although a large District steel producer stated
that the increase may reflect, in part, inventory building prior to
a possible strike in late January. Citing the crisis in the Middle
East, one large District exporting manufacturer recently suspended
international travel of its employees, and ordered all US. citizens
working abroad to return home.
Construction
Commercial construction in the District is widely expected to be
weak this year, while spending for schools, highways, and other
public construction is expected to take up some of the slack. A
large District producer of building materials stated that projects
underway are being completed, but new projects are well below levels
reached at the end of 1989. A cement producer projected a double-
digit decline in the firm's shipments in 1991. Cement industry
shipments in 1990 (through October) showed that relative strength in
the District has disappeared, with shipments growth in the Great
Lakes region now running about equal with that for the nation as a
whole (on a year-to-date basis). A supplier of materials to home
builders in the Chicago area reported that business for many of its
customers has slowed dramatically, although sales growth for
consumer do-it-yourself projects was holding up well even through
the Christmas season.
Financial Institutions
Several District financial institutions are experiencing weak loan
demand from many sectors, although some contacts noted a slight
increase in credit card usage last quarter. Several bankers reported
continued weak growth in commercial real estate and industrial
loans, which was attributed mostly to an unwillingness to borrow.
One large bank reported increases in services fees, but basically
unchanged lending policy. A savings and loan analyst noted some
growth in home mortgage lending when mortgage rates were below 9.5
percent, but most of that demand is for refinancing. One large
bank's credit card volume increased in the fourth quarter, with half
of the gain due to increased usage by existing accounts. This lender
also reported no increase in consumer delinquency rates (through
November), although delinquency in home mortgage lending had
increased slightly.
Agriculture
Corn and soybean exports have fallen off sharply in recent months.
From January through August of 1990, the combined U.S. export
tonnage of corn and soybeans held nearly 13 percent above the year-
earlier level. But from September through December, the combined
export tonnage was off a third from the year-earlier pace and the
lowest for that period in at least 16 years. Several factors have
contributed to the sharper-than-expected downturn, including the
emerging trade problems facing the USSR, bumper harvests elsewhere
in the world, and various disruptions related to the Mideast
situation. Most analysts believe that the export pace will pickup in
the months ahead but remain short of the year-earlier level.