May 12, 1982
Summary
Seventh District economic activity remains very weak. The
expected, or hoped for, spring upturn has not developed. At best the
decline is leveling off, but further softening is evident in
producer goods. There is no evidence that a significant pickup will
occur soon. Consumers are very cautious. Deepening financial
problems are causing corporate executives to push austerity
programs. Purchasing managers reported continuing declines in
output, employment, inventories, and orders in April, but the rate
of decline apparently moderated. Inventories are said to be low, but
are being reduced further. Price cutting is widespread. The high
value of the dollar is aiding foreign competitors. Construction
activity probably will set a postwar low this year. Farmers are
encouraged by the rise in livestock prices, but income prospects,
overall, remain poor and farmland values have been declining since
last fall.
A Dismal Profile
The region of the Seventh District has been in a
depressed state for three years. In March, total payroll employment
in the five-state area was 7 percent below March 1979. Nationally,
despite the recent decline, it was still up 2 percent. Manufacturing
employment was down 19 percent in the district, compared to a
decline of 8 percent for the nation. The situation appears to have
worsened somewhat since March—with further layoffs in a wide
variety of activities. Weakness is pervasive, not only in
manufacturing, but in construction, transportation, trade,
agriculture, and state and local government. Michigan has the most
serious employment problem, but all district states compare
unfavorably with the nation.
Austerity Programs
With hopes fading for an early recovery, many
individuals, businesses, farmers, and state and local governments
are retrenching on new outlays and commitments. Businesses are
cutting staff, reducing compensation (when possible), paring
inventories, and postponing or canceling capital expenditure
projects. Less essential outlays on travel, public relations, market
research, advertising and sales promotion are under very close
scrutiny. Under the circumstances, the danger of a cumulative
downturn is greater than at any time since World War II.
Bankruptcies and Closings
Financial stress is reflected in a wave
of bankruptcies and closings of factories and retail establishments.
Chapter 11 filings have shot up. In one jurisdiction there were more
Chapter 11 cases in March than in all of 1981. Bankruptcies of
smaller manufacturers, retailers, truckers, real estate companies,
and farm-related enterprises are most frequent. Some larger firms,
technically insolvent, are operating under special arrangements with
creditors or are being kept afloat by parent companies. Many stores
have been closed either because of bankruptcy or unprofitable
results. Permanent plant closings are also frequent, especially
manufacturers who have lost supplier contracts with OEM's. One
result of shutdowns is the large volume of forced sales of
relatively new vehicles and other equipment.
Inflation
A dramatic shift in the inflation picture has occurred
since the start of the year. Price discounting is more common that
at any time since the 1930's, and is especially prevalent in steel,
nonferrous metals, building materials, paper, and transportation—rail, truck, and air. Many observers believe that discounted prices
will surge once sales improve. The drop in petroleum prices is
believed to have ended. Prices of medical and utility services, and
many manufactured goods, continue to rise at a rapid pace.
Nevertheless, assumptions on the long-term inflation rate have been
scaled back from 10 percent to 8 percent or less.
Employment
Layoffs, either temporary, indefinite, or permanent
continue not only in manufacturing but also in trade,
transportation, real estate, and finance—particularly S&L's.
Facilities of state employment offices are hard pressed. Many
workers are exhausting unemployment benefits.
Labor Concessions
Negotiations for concessions on labor contracts
continue. In the main, these agreements have merely slowed increases
in total compensation. Some new labor agreements call for first-year
wage boosts in the 8-10 percent range, even in depressed industries.
The auto industry seems to have reconciled itself to high domestic
labor costs, now $21 per hour, with a view to substantially
increasing foreign sourcing of major components, including engines.
Motor Vehicles
Small truck sales rose sharply in the first quarter,
partly reflecting a favorable reception for new domestic compact
trucks. Demand for heavy trucks remains very weak. Total car sales
slipped back in April after major rebate programs expired.
Nevertheless, output of cars will rise substantially in the second
quarter because inventories were reduced in the first quarter. Truck
output is above last year.
Capital Expenditures
The outlook for producer durables continues to
deteriorate. Various manufacturers report orders off 30 to 60
percent from last year's mediocre levels, with backlogs
"evaporating". Support for "safe harbor" leasing is very strong.
Among the weakest lines are equipment for railroads, trucklines,
construction, and agriculture. Machine tools and oil and gas field
items are declining rapidly. The largest locomotive plant, scheduled
to close, will remain open due to orders booked recently.
Steel
Demand for steel has been much weaker than expected,
especially for heavy products. Estimates for 1982 shipments have
been reduced further. Some facilities are being closed.
State and Local Governments
Virtually all state and local governments are seeking to prevent or reduce large prospective
budget deficits. Efforts to reduce employee compensation, or
moderate increases, are meeting strong union opposition. Various
programs are being scaled down and facilities are being closed.
Construction
Home sales and residential construction remain at a
very low ebb. Housing permits in the Chicago area were under 800 in
the first quarter, compared to 2,300 a year ago, and over 7,000 in
the first quarter of 1978. Creative financing is helping to move
some existing properties but is not boosting new construction.
Agriculture
Although the district agricultural picture remains
bleak, livestock producers are enjoying modest profits due to higher
prices and low feed costs. Capital expenditures by farmers remain
weak overall, especially for machinery, but orders for grain storage
facilities have improved recently. Our latest quarterly survey of
agricultural banks shows district land values down 4.5 percent since
the beginning of the year, and down 7.5 percent since last
September. The number of real estate transactions is down and
foreclosures and forced sales account for a small, but much higher-than-normal, share of the total. Field work, after a somewhat late
start, has progressed rapidly.