After a brief pause in the second quarter, the Midwest economy is expected to accelerate again in the second half of 1993.
A combination of strong profits in the manufacturing sector, a moderate recovery in consumption, continued strength in exports, and a deterioration in the value of the dollar against the yen all point to the same thing -- gains in Midwest manufacturing.
A pickup in vehicle production is the primary reason behind the slightly more bullish national outlook in the second half of 1993. The auto industry alone is expected to add almost 1% to real gross domestic product growth in the third quarter.
On net, real disposable income is forecast to rise 1.2% in the second quarter and 2.6% in the third quarter, still 0.2% ahead of the national average for the two quarters combined.
A Question Mark
The forecast for more robust Midwest growth, however, is not without its risks. Current contracts between the United Auto Workers and the Big Three automakers expire in September. Any contract-related strikes would derail much of the momentum expected for the second half of this year.
The steelworkers' unions are also in negotiations. If contracts with three of the remaining top four steelmakers are not settled by July 31, thousands of steelworkers could go on strike. This would disrupt supplier and user production throughout the Midwest.
But barring widespread strikes, the Midwest is positioned to be the fastest-growing region in the country in the second half of 1993.
Autos and Light Tracks
Pent-up demand, a pickup in trade-in values, lucrative incentives, fleet sales, and the delayed gains associated with poor weather conditions in the first quarter pushed auto and light truck sales to their highest level in almost four years in the second quarter.
Moreover, most of those gains were made by the Big Three. In a sharp reversal of the 1980s, aggressive price hikes on the part of the Japanese have given market share back to the Big Three.
Some correction to recent highs is expected for the third quarter, but the underlying trend in sales should remain positive.
Momentum in Production
The slowdown in total sales will not stop the upward momentum in domestic production.
A combination of low inventories, market share gains by the Big Three, and strike-hedging on the part of the Big Three have all contributed to third-quarter gains.
The problem is the fourth quarter. The bet is that the risk of a UAW strike will place an upward bias on production in the third quarter. The Big Three are likely to build inventories, even if sales soften somewhat, to hedge against a possible strike.
Even if a strike is averted, those inventories will have to be drained in the fourth quarter.
The Strike Factor
The largest risk to the forecast in the second half of 1993 is strike risk. The UAW negotiations pose a greater threat to the overall economy than the steelworkers' talks.
In December, First Chicago argued that the risk of a widespread UAW strike, particularly against General Motors Corp., was high.
Strike-hedging on the part of the Big Three, in particular, would produce a pattern in production that would mimic that of a strike in the fourth quarter, even if a strike were averted.
Nothing has changed since December to change that view. If anything, the UAW is digging in deeper than expected. The UAW has vowed to protect health-care benefits -- a critical issue for the Big Three -- by striking. Other demands already on the table include job security, a ban on plant closures, and an 18% wage hike from Ford Motor Co.
The wage-hike request is of particular concern to the Federal Reserve. An 18% increase in UAW wages over the next three years would be inflationary.
Summing It Up
The Midwest economy will accelerate in the third quarter. The risk of a UAW strike virtually ensures it. The prospects for the fourth quarter are not as good. Strike or not, inventories will need to be drained, which will be a drag on production at the Big Three.
Even with that correction, however, the underlying trend in production will remain positive in the second half. The Midwest will end the year substantially better than it started it.
