October 23, 1991
Summary
Underlying trends in the District economy have changed little over
the past month, according to most contacts, although continued
sluggishness in consumer demand has led to some slowing in the pace
of recovery in industrial activity. Manufacturers generally
continued to provide an important contribution to District growth,
but several contacts stated that auto production gains could slow in
the fourth quarter if car sales growth does not improve. District
commercial and industrial loan demand remained soft, in part due to
moderate requirements for inventory financing. The agricultural
harvest is proceeding rapidly, and harvest estimates have been
raised recently.
Consumer Spending
District contacts indicate that consumer spending gains remained
sluggish in September and early October, with dollar sales depressed
by intense price competition. A large general merchandise chain
reported continued flat sales and stated that there was little sign
of a recovery in consumer spending. A retailers' association in
Indiana stated that its membership's sales growth generally remains
flat, while losses from bad checks have not improved significantly.
A retailing analyst reported that consumer caution has slowed
spending growth in Iowa to the rate seen nationally, despite
relatively high levels of consumer resources. Citing longer car
holding periods, a retailers' association in Michigan stated that
vehicle service stores were doing relatively well. After consistent
year-over-year declines in sales over the summer months, a large
department store chain reported that sales in early October were
running slightly ahead of last year, but the year-ago comparison was
against the period when sales began to be impacted by the recession.
Sales for the rest of the year are expected to be flat with a year
ago, according to this contact. A market research firm reported that
Christmas purchasing plans dropped from August to September,
reaching a level below the weak year-earlier period.
Autos
Disappointing new car sales growth could temper the production gains
being experienced in the Districts auto industry. Several industry
analysts noted that September sales rates benefited from strong
fleet sales, and fleet sales are expected to run through November.
An industry economist reported that car demand from individuals had
improved somewhat early in the summer, but slipped a little in
recent months. Current car and light truck production plans for the
fourth quarter imply a small gain from the third quarter on a
seasonally adjusted basis, and a small decline in the first quarter
of 1992, according to one economist. An auto parts supplier remained
apprehensive about the first half of 1992 in the absence of an
increase in car sales rates, although several analysts anticipated
increasingly aggressive incentive programs in coming months. A
finance subsidiary of a large automaker reported continued growth in
lending, citing a pullback from banks in financing consumer
purchases and dealers' inventory. Delinquency rates have caused some
"severe heartburn" for many lenders, according to this contact,
leading to higher down payments and generally stricter scrutiny of
the marginal borrower. However, one industry economist reported that
the overall loan turndown rate generally has declined since the
first quarter. Because dealer inventory commitments remain very
cautious, financing inventory hasn't been a difficult problem for
most dealers, according to this contact.
Manufacturing
Manufacturing activity generally continued to boost the overall
District economy in recent weeks. The most recent purchasing
managers' surveys for Chicago, Detroit, Western Michigan, Milwaukee
and Indianapolis each showed a majority of respondents indicating
expansion in orders and production, although some slowing in the
pace was indicated in the Chicago survey. A large steel producer
reported that the auto industry continued to provide the major
source of strength in demand. Steel industry production is expected
to continue to expand from the third to fourth quarter (on a
seasonally adjusted basis) under conservative assumptions about
shipments to the auto industry, according to this contact. A large
manufacturer of a wide variety of specialty supplies reported that
sales in most product lines remain flat, and that sales of a product
that has historically been a leading indicator has yet to show an
upturn. A supplier to District manufacturers of metal furniture
stated that sales by these firms appeared to have passed their
trough, after a difficult period. Sales of construction machinery in
the District began to slump again in early August, according to an
industry analyst, after a slow recovery earlier in the year. Year-
to-date construction machinery sales in the District are still below
last year's levels, but the decline has not been so severe as in the
nation as a whole. A large shipper stated that overseas shipments of
agricultural and construction machinery continued to expand over the
summer months.
Banking
Most banks reported that commercial and industrial loan demand
remained soft in recent weeks, with several indicating that most
customers remain unwilling to commit to inventories. One middle-
market lender reported that loan demand is generally slow, and
stated that customer optimism has been waning since a recovery in
the summer. Capital spending project cancellations have begun to
arise, according to this contact, joining the continuing reports of
postponements. A middle-market lender to businesses located
throughout the Midwest could not identify a commercial or industrial
sector where customers had seen a significant upturn in activity.
This banker stated that most customers linked to the auto industry
continued to expect some small improvement in sales over the rest of
the year, but these expectations had weakened over the past 60 days.
Several banks reported that commercial and industrial loan demand in
Michigan remained soft, and one contact expressed concern about the
state's prospects in the absence of a solid recovery in auto sales.
However, one banker reported that several banks in the state were
"fully loaned" and were eager to sell participations. A recent
survey indicated that firms in the Great Lakes and Pacific regions
report the least difficulty in obtaining credit among firms surveyed
nationwide, and the survey's directors stated that the survey
results show that credit has been easier to obtain during the recent
recession than in prior recessions. Residential mortgage loan demand
in the District remained a bright spot, according to one contact, as
mortgage rates continued to decline around the District.
Agriculture
The District harvest is progressing rapidly. The corn and soybean
harvest ranges from 25 percent complete in Michigan and Wisconsin to
75 percent in Illinois. Except for Iowa, the harvesting progress is
double the normal completion rate for early October. Yields are
proving much better than expected in many areas, despite a premature
killing frost in September. The corn and soybean production
estimates for District states were revised upward by 4 and 6
percent, respectively, in the USDA projections released on October
10. The soybean harvest is now expected to match that of a year ago,
both in District states and nationwide. Corn production is expected
to be down 10 percent in District states and down 6 percent
nationwide.