July 1, 1983
Summary
Things continue to look up in the Seventh District with prospects
favorable for a recovery through the year. Even so, operating levels
in durable goods manufacturing will remain low relative to
prosperous levels. Summer declines in steel and autos will be
smaller than usual. Hiring intentions are significantly stronger
than last year at this time, and claims for unemployment
compensation are lower. Increases in worker compensation will be
smaller this year, but price inflation is accelerating slightly.
Productivity gains have been large this year, but are likely to slow
down. Retail sales continue to improve, helped by a heat wave since
mid-June. Demand for capital goods is showing some life, but mainly
for replacements. Closings of marginal manufacturing plants
continue. Housing remains vigorous, but rising loan rates cause
concern. Some new large office buildings have been announced.
Contracts for highway work have surged. The high value of the dollar
has sharply curtailed exports of some producer goods. Farm crops are
coming along after a slow start, but are still behind normal
development. Farm prices are weaker than had been expected, partly
because of reduced export demand.
Foreign Trade
The high value of the dollar is the principal cause of a "drying up"
of some export markets. Exports of construction equipment and heavy
trucks are 80 percent below the levels of two years ago. There is
concern that foreign producers will capture these markets
permanently. The high dollar also encourages imports of capital
goods such as machine tools, medium trucks, and aircraft components.
Reduced airline traffic to the U.S. and smaller foreign tourist
business also reflect current exchange rates as well as restrictions
on conversion of Latin American currencies to dollars.
Employment
Surveys show that companies planning to increase hirings now
outnumber those planning reductions, reversing the pattern of a year
ago. Most of the change reflects fewer planned reductions. No new
major layoffs are foreseen. However, most of the companies that cut
staff drastically in the past two years do not plan to reverse these
policies. Middle management has been most affected by cutbacks. Job
opportunities remain very limited except for well-trained
specialists such as data processors. The weak job market continues
to hold down increases in compensation. Many companies are
continuing freezes for exempt workers. Unions face tough bargaining
in upcoming negotiations.
Inflation
Prices are strengthening somewhat, overall, but no significant
upsurge is expected this year. Cost structures have benefitted from
excellent productivity gains, but this trend will slow as activity
rises further. Most firms strongly desire to widen profit margins,
which are far below the level of the late 1970s.
Housing
The uptrend in residential construction continues. Fixed rate home
mortgages, on average, have increased from about 12.5 percent to 13
percent. This rise may have stimulated demand from borrowers who
fear further increases. (Lenders continue to experiment, with
varying success, with innovative adjustable rate mortgages, which
still lack general acceptance.) A further increase in rates to 14 to
15 percent could seriously dampen the market. Meanwhile, demand for
building materials is excellent, with most gypsum board plants
operating at full capacity. Gypsum board is on allocation in some
areas, but this is not restricting construction activity.
Nonresidential
Work on new factory buildings is at a very low level, and no
improvement is foreseen. The office building sector is still
declining, but some large new downtown projects in Chicago are being
unveiled for an early start. The market is overbuilt, but developers
believe that space will be needed in three or four years when these
projects are completed. Moreover, some developers wish to take
advantage of the temporary willingness of "hungry" contractors to
enter bids that may seem cheap later on. There is a large volume of
rehab work, often handled at wages below union scale. Bridge and
road work will be up sharply in the second half.
Capital Goods
Demand for equipment produced in the District is picking up, but not
as rapidly as the national aggregates on orders and output indicate.
Producers of steel plates and castings report some rise in demand
from equipment producers. Mainly this is for replacement needs,
either parts or whole machines. Few industries have large new
facilities underway or in the planning stages. Sales of truck
trailers are booming because of new regulations. Orders for heavy
trucks have improved enough to raise output schedules from very
depressed levels. Freight car orders also are up slightly from near
zero. Business communications equipment, which held up during the
recession, remains strong. Machine tool orders remain very weak, but
press orders have increased slightly. Heavy construction equipment
remains very depressed with large stocks in the field, including
those of leasing companies. Farm equipment inventories represent a
whole year's sales, and new layoffs have been announced. Foreign
demand for U.S. equipment is very low.
Inventories
Liquidation of inventories continued into the second quarter for
many companies, but in large part this was involuntary as sales
exceeded expectations. Rebuilding is apparently underway now, and
will contribute to second half strength. Inventories of most cars,
trucks (including heavy trucks), recreational vehicles, steel,
nonferrous metals, capital goods components, and building materials
are quite low. Oil products are in good balance. Retail stocks of
finished farm tractors and heavy construction equipment are far in
excess of current needs. General merchandise inventories at retail
are lean, but additional supplies are readily available.
Motor Vehicles
Sales of autos (especially large models) and light trucks
(especially compacts) are running well above last year. Orders for
heavy trucks, many of which are custom built, have increased.
(Because of downsizing of the heavy truck industry, there is concern
that a surge in demand would strain capacity.) In contrast to last
year when car output schedules were reduced several times, they have
been increased successively this year. Third quarter output is now
expected to be the highest for the period since 1978. The
improvement in autos has reverberations throughout the region for
companies making seals, locks, electric components, frames etc.
Retail Trade
General merchandise chains have been reporting improvement in sales
for several months, both hard and soft goods, with the Midwest
lagging the nation. The uptrend had continued in the face of an
abnormally cold spring. A heat wave after mid-June brought a spurt
in sales of air conditioners, dehumidifiers, light apparel, and
recreational goods, which had been slow. Other lines benefited from
this increased "traffic."