December 6, 1983
Summary
The tone of business and consumer sentiment in the Seventh District
is much improved compared to the situation six to 12 months ago, but
the firm confidence of several years ago has not returned. Gains in
activity are widely expected to continue into 1984, with additional
lagging sectors participating. Estimates of demand for most consumer
durables have been raised periodically in the past several months,
in contrast to downward revisions in 1982. Retailers anticipate the
best Christmas in five years, but are stocking and hiring
cautiously. The strength of demand for workers in the District
continues to fall far short of the national experience, despite
substantial recovery in the auto industry. The pickup in demand for
heavy capital goods remains spotty. Inventories, generally, continue
under close control. Shipments of household appliances and
paperboard were at record levels in the third quarter, but volume of
most durable goods industries remains far below earlier peaks, and
is not expected to regain those peaks in the year ahead. Heavy
inroads of foreign competition have intensified. Residential
builders are entering the slow winter season with dampened spirits
relative to last spring. Farmers are beginning to increase purchases
of supplies and equipment slightly, reflecting improved income and
expectations of larger plantings in 1984.
Confidence Surveys
Formal and informal surveys of executive and consumer attitudes in
the District show substantial improvement compared with dismal
reports early this year. Professional pollsters at the University of
Michigan emphasize that indexes of sentiment reflect the direction
rather than level of activity. Substantial gains in such measures in
this region indicate more a feeling of relief that the long decline
in activity has come to an end—and has been reversed in some
sectors—rather than the old time ebullience.
Retail Trade
Most general merchandise retailers (not all) have reported improved
sales and are counting on substantial increases in Christmas volume.
Gains are projected in the 6-12 percent range over last year's
results, which were disappointing. Most of the rise will be real
because prices average only 1-3 percent higher. Merchants speak of
"pent-up demand." Actual total sales volume may never be known
accurately because of the growth of discounters, off-price specialty
stores, and catalog houses that are not adequately tabulated. Credit
use is up. Among the strongest lines are furniture, appliances
(especially microwaves), some types of home computers, video
recorders, some clothing, and various luxuries such as expensive
dolls and cordless telephones. Merchants have been stocking
cautiously for Christmas, preferring the chance of some stockouts to
general excess. Hirings of temporary or part-time clerks are said to
be much less frequent than in past years of rising sales.
Employment
In September, payroll employment in Illinois, Indiana, Iowa, and
Wisconsin was still below a year earlier. It appears that little
improvement occurred in October. Michigan showed a gain in
employment from September 1982, reflecting motor industry recalls of
workers. Despite lack of employment gains, all states reported
substantial declines in estimated unemployment. In the 5-state area,
employment was 25,000 below year-ago in September, while
unemployment was estimated to be down 370,000. (Nationally, the gain
in employment in this period was much larger than the decline in
unemployment.) In Illinois, seasonally adjusted employment in
October was the same as in December 1982. In this period the state's
reported unemployment rate dropped from 12.8 to 9.7 percent.
The dichotomy between stable employment and declining unemployment is explained as "outmigration", and "withdrawals from the labor force." In any case, job markets are still weak. Help-wanted ads and hiring intentions are up significantly, and lay-offs have been reduced, but these gains are offset by additional establishment closings and employment cutbacks, often through attrition. Some employers are offering generous incentives for early retirement to reduce "redundancies." Others are using overtime to handle increased output to such an extent that worker unrest has increased.
Autos and Appliances
Both auto and appliance producers substantially underestimated
demand for certain models in 1983, reversing the tendency to
overestimate noted in earlier years. As a result, inventories are
too low. Auto output will be 60 percent above last year in the
fourth quarter, with strong pressure to build more large cars.
Output has been restrained by a desire to avoid quality problems.
First quarter auto output is scheduled to be up 50 percent above the
year earlier total. Appliance shipments, in units, were up 34
percent in the third quarter to a new all-time high. Industry
analysts had projected appliance shipments to rise 7 percent in
1983, but the actual gain is likely to exceed 15 percent.
Capital Goods
Demand for capital equipment produced in the District has increased
somewhat, but in a highly uneven manner. Output of replacement parts
has increased on a fairly broad front. Machine tool orders are far
above last year, but only 40 percent of the rate of early 1980. A
diversified producer of capital goods reports bookings at only 50
percent of a "good level." Demand for steel for capital goods and
construction remains near the recession low. Orders for steel
castings for equipment are at only 40 percent of capacity.
Production of heavy trucks will rise in early 1984, but only to 50
percent of the 1979 level. Truck trailers, almost unique among
capital goods, are being produced at capacity because of increased
size limits. Railroad equipment orders are few and small. Demand for
construction equipment has picked up slightly. Farm equipment sales
are expected to improve soon, but large inventories can accommodate
most needs. Some District electric utilities have further slowed
work on nuclear generating plants, partly because of soaring costs
which may exceed original estimates ten-fold. A large number of
District capital goods plants are closed or scheduled for closing,
including plants producing rail cars, trucks, materials handling
equipment, construction equipment, and farm equipment. In some cases
companies headquartered here have alternative sources, either in
other regions, especially the South, or abroad.
Foreign Competition
The current plight of producers of capital goods partly reflects
slow demand world-wide. However, they complain bitterly of the ever-
growing threat of foreign competition, which they attribute to the
high value of the dollar, subsidies by foreign governments
(including financing), and trade barriers abroad that hamper
exports. Increasingly, capital goods producers are following the
lead of the auto companies by arranging foreign sources for
components including fasteners, castings, and engines, and complete
products such as machine tools and construction equipment. In some
cases this has resulted in the closing and dismantling of domestic
plants.