Beige Book Report: Chicago
June 22, 1994
Summary
Seventh District economic growth slowed during the second quarter,
as both consumer spending growth and manufacturing activity
moderated. Light vehicle production declined on a seasonally
adjusted basis in recent months, and preliminary schedules show flat
to slightly declining output in the third quarter. District payroll
employment has grown more closely in line with the national overage
during 1994, but household survey data and help-wanted advertising
indicate that labor markets in the region remain tighter than for
the nation as a whole. The consensus forecast of 30 Midwest
economists prepared for an auto industry outlook conference called
for moderate GDP growth to continue during 1994 and 1995.
Manufacturing
District manufacturing activity generally remained quite vigorous in
recent months, with purchasing managers' surveys depicting slower
but still-strong growth through May. The composite index of
production components of purchasing managers' surveys in Chicago,
Detroit and Milwaukee declined from 75.0 percent in April to 70.6
percent in May. The May level was still consistent with moderate-to-
robust expansion in manufacturing activity, however, and this
indicator remained well above the national average. The Chicago
production index climbed to 76.5 percent in April -- nearly its
highest level since 1970 -- but then fell back slightly during May.
A larger drop was registered in the Detroit index during May,
however, consistent with the slower momentum seen in auto industry
output. A large utility reported that growth in power sales to
industrial customers in Michigan eased during early June, after
outpacing total sales through most of 1994.
Among key industries, District steel production rose on a seasonally adjusted basis in April and May, climbing to its highest level for May since 1989. Output is expected to slow somewhat in coming months, however, partly because some large integrated mills an bringing production facilities down for necessary maintenance and repair. Third quarter production is still "sold out," with continued strength in orders from the motor vehicle, appliance, farm machinery, and construction equipment industries. Reports from manufacturers of farm machinery and construction equipment remained upbeat. Production and retail sales of heavy-duty trucks continued to climb in recent months, although current schedules imply a small decline in output in the third quarter. An industry analyst stated that any output gain in the latter half of the year is not likely to be significant, given current capacity levels, but order backlogs are still believed to be of high quality, and the order cancellation rate remains below year-earlier levels and well within historical norms.
Consumer Spending
Surveys and reports from large retail chains suggest that retail
sales growth moderated (on a year-over-year basis) during April and
May. An index of same-store sales growth constructed by a check
authorization firm showed a declining rate of growth in retail sales
in the Midwest during April and May. A survey of a large number of
retail locations in Illinois and Indiana showed sales growth
moderating in April, except for hardware and other housing-related
outlets, where sales growth remained relatively strong. A survey of
shopping centers also pointed to a slower sales growth during April.
While the April slowing has been partly attributed to the early
Easter holiday this year. reports from a number of retail chains as
well as a group of single store owners suggested sales growth
remained sluggish during May. One large retail chain reported that
modest growth was little changed during May and early June. and this
contact stressed that competitive pressures on price and margins
continue to intensify in most of its market areas.
Autos
District light vehicle output has increased slightly more than the
national average during 1994, but assemblies declined on a
seasonally adjusted basis in recent months, and preliminary
schedules show little sign of any substantial rebound during the
third quarter. Reports from large automakers and a small sample of
large auto dealerships suggested that vehicle sales have also slowed
in recent months, partly due to capacity constraints in production
of some popular models. One large automaker stated that "we can no
longer confirm that the market is red-hot." Higher interest rates
have increased vehicle financing costs and dealer floor planning
expenses, curtailing some sales gains. Another large automaker
reported that dealer showroom traffic flattened out in March and
April, while sales closures rates declined slightly. Reports from a
small sample of large auto dealers were mixed but still suggestive
of slower sales, with most of them indicating that increased
interest rates have cut into sales gains.
The recent slowdown in auto industry momentum is coming from high sales levels, however, and most industry contacts expressed optimism about renewed growth in the latter half of the year. Some industry analysts have expressed concern that a surge in cars coming off lease could curb new car sales during 1994 and into 1995, much like the bubble of "nearly new" cars that arose after the acceleration in deliveries to captive rental car fleets in the early 1990s. A large automaker emphasized that it has planned its leasing promotions to avoid a serious problem in this area. No car dealers expressed concern about the phenomenon, with one noting that "the average person holds on to a new car for three years, if they buy it or if they lease it. We don't see this being a very big deal." Another dealer expected the increased share of leasing to promote new car sales by encouraging people to buy new cars more often. Asked what happened when 2-3 year old cars started coming back into the dealership, this contact stated "we can't buy enough 2-3 year old cars as it is." An automobile dealers' association reported that its measure of dealer optimism rose to an all-time high in April. A large automaker stated that pent-up demand for motor vehicles remains substantial and should provide a strong base for growth over the balance of 1994 and into 1995.
Employment
District labor markets continued to strengthen in April and May. A
survey of employer hiring plans conducted by a large personnel
services firm showed a slight decline (to still-high levels) in the
majority of Midwest employers planning to add to their workforce
next quarter. Hiring plans among durable goods manufacturers
continued to top the list of 10 industrial categories within the
region, and remained significantly stronger than their national
counterparts. Purchasing managers surveys generally confirmed the
upward momentum in District manufacturing employment during May.
Reports from a number of retailers and manufacturers pointed to
shortages of workers in lower-wage level positions, adding to wage
pressures in this area.
Growth in total payroll employment in the District has fallen in line with the national average during 1994, but help-wanted advertising and unemployment rate estimates point to relatively tight labor markets in the region. For example, among the 11 large states for which the Bureau of Labor Statistics computes direct unemployment rate estimates, Michigan and Illinois had the second and third lowest unemployment rates, respectively, during May, while the unemployment rate in Michigan has fallen to a 20-year low during 1994. The unemployment rates for Indiana, Iowa and Wisconsin are below those for Illinois and Michigan, and the gap between the District unemployment rate and the national average continued to widen in the District's favor this year.
Outlook Conference
The Federal Reserve Bank of Chicago's annual Auto Outlook Conference
was held in early June. The consensus GDP forecast of 30 economists
from around the District that was prepared for the meeting called
for a 3.6 percent increase in real GDP in 1994. While a significant
improvement from the forecast prepared in December 1993, the growth
rate implied by the latest forecast over the balance of 1994 was
unchanged from the pace expected last December for 1994 as a whole.
The consensus called for car and light tuck sales in 1994 to total
15.4 million units, up from 13.9 million units in 1993, while a
smaller gain was anticipated for 1995. Presentations by auto
industry representatives were largely upbeat about the underlying
upward momentum in the marketplace, although several expressed a
note of caution about recent sales trends. Competitive price and
market pressures continue to concern many industry suppliers.