September 20, 1983
Summary
The economic recovery in most Seventh District centers continues to
lag the national pattern, except for areas concentrating on
automotive products. Even in that industry, operations are far short
of the peak levels of the late 1970s. Major Midwest companies are
still engaged in far-reaching cost-reduction programs to restore or
improve profitability and to counter the high value of the dollar.
Employment improvement, overall, is slower than in the U.S., but few
new layoffs of importance are imminent. Retail sales were at
favorable levels in August, aided by hot weather. Demand for capital
goods produced in the region has shown only slight improvement,
except for a surge in orders for truck trailers. Steel demand
remains concentrated in lighter products, and has been disappointing
in total. Single-family home sales and permits slowed in the summer
as a result of higher interest rates, but leasing of office space
has accelerated in downtown Chicago. State governments now
anticipate surpluses rather than deficits because of increased taxes
and tight budgets, but some local governments remain under severe
strain. Corn and soybean crops have been severely damaged by hot
weather and drought. Higher crop prices will boost income for many
farmers.
Autos
Sales of cars would be even stronger if more large, rear-wheel-drive
domestic models and more Japanese cars were available. Supplies of
popular domestic models have been limited by capacity, which had
been reduced, while the Japanese export quota has determined the
level of U.S. sales of their cars. U. S. production schedules have
been raised for the remainder of the year and appear firm. Measures
are being taken to increase large car production capacity even
though government penalties for failure to meet CAFE standards could
be imposed under existing regulations.
Cost Cutting
Various Seventh District companies have announced ongoing programs
to reduce costs substantially relative to the general price level
over the next two or three years. The main reason for urgency is the
substantial advantage foreign competitors have because of the high
value of the dollar. Steps include drastic reductions in overhead
staff; pressure on unions to accept concessions, on compensation and
work rules; closing of high-cost facilities (usually in the Midwest)
and consolidation in more efficient units; pressure on suppliers to
cut prices; and "outsourcing" components, previously made "in
house", if cheaper supplies can be obtained from others, either in
the U.S. or abroad.
Employment
Substantial increases in employment in the District since last
December have been concentrated in the automotive industry and
residential construction. The bulk of the expected automotive
callbacks probably already have occurred. New claims for
unemployment compensation are down sharply. While few important new
layoffs are in immediate prospect. announcements of closings of
long-established facilities continue. Where closings involve major,
older facilities, the announcement is merely the coup de grace
following a long period of attrition. Other plant closings follow
failures of labor and management to agree on concessions. On the
other hand, some closed plants have been reopened following
successful concession negotiations.
Consumer Purchases
Several merchandise retailers reported strong August sales, with air
conditioners and other warm weather merchandise leading the uptrend.
However, virtually all classes of goods have sold well, Including
furniture, appliances, and carpeting, which tend to be associated
with house sales. The pickup in furniture was too late to save a
number of well known stores, which went out of business—casualties
of high interest rates according to managers. Recreational vehicles
have had a very good year. Airline travel continues to show large
gains in volume with promotional fares still a factor.
Capital Goods
As reported in the last Commentary, the important capital goods
producers of the District have not participated proportionately in
the uptrend in the national aggregates. Many plants remain closed
and others are operating at less than 50 percent of capacity.
Imports and loss of foreign markets have reinforced sluggish
domestic demand. Some say that the high value or the dollar also
makes investments in production facilities abroad more attractive.
In most cases where increases in orders have been reported-for
example, machine tools and heavy trucks-the rise has been modest and
from a very low base. One sector that is going strong is tandem
trailers, permitted under the new federal law.
Housing Slows
Higher interest rates slowed housing activity in July and August. In
the District, July home permits were down sharply from June.
Conventional mortgage rates in the Chicago area had moved up to the
14 percent range in the summer, but have been reduced since late
August by nearly half of the lenders surveyed by one-eighth to one-
half percentage points. The state of Illinois recently provided $70
million obtained by sales of tax-exempt bonds for mortgage loans at
10.55 percent-3 to 3-1/2 percent below the market. The money was all
spoken for at participating lending institutions in an hour or two,
with some rancor evidenced by disappointed applicants.
Commercial Building
Factory construction and new utility projects are at a very low
level. However, a number of large new office buildings have been
announced for downtown Chicago, and more announcements are expected.
(Downtown Chicago has been the only strong area in the District for
office buildings.) Earlier this year. some experts predicted that
the glut of office space in the Loop would last for years. Recently,
however, leasing activity accelerated markedly, rents firmed, and
concessions to lessees were cut back.
State and Local Governments
In the last legislative sessions, all five states of the District
enacted tax increases to eliminate current or potential deficits.
Higher taxes, tighter expenditure control, and the pickup in the
general economy now are expected to produce budget surpluses in all
five states in the new fiscal year. Increased rates were levied on
corporate and personal incomes, retail sales, and gasoline. Rarely
have the states moved in unison with such vigor to increase
revenues, but the need was urgent because state deficits are
illegal. Meanwhile major cities are wrestling with revenue
shortfalls and demands for higher salaries for public employees,
including teachers, police and fire personnel who have called
strikes in some cases. Some layoffs and short weeks have been
ordered.
Agriculture
Continuing searing drought through August caused the USDA to reduce
its estimate for the corn crop of the District states by a further
20 percent. With large acreage cuts, the corn crop is now expected
to be 53 percent below last year. The soybean crop, also badly
damaged, is now expected to be down 28 percent. The extent of the
drought damage varies widely and is most severe in Illinois and
Indiana. Because of higher prices, earnings of farmers who were
least affected by the drought, and those receiving PIK grain, will
improve significantly.