March 13, 1984
Summary
The expansion in the Seventh District has strong momentum, with
prospects favorable for gains through the year. Consumer spending,
still the prime mover, has been above expectations. Confidence
levels are the highest in several years. However, employment
increases are still mainly in manufacturing. Output of autos and
heavy trucks is at capacity levels, restricted by component
availability. Some producers of construction equipment, mining
equipment, machine tools, and freight cars report increased orders,
but capital goods output, overall, remains far below peak levels.
Not all sectors in the District are expanding vigorously, but there
is no evidence of new deterioration. House sales have been strong
relative to past years. Price inflation is increasingly evident.
Inventory investment is expected to accelerate, with stocks
currently low in virtually all lines. The signup of dairy farmers
for the new government output restriction program was far less than
expected.
Price Inflation
Price increases clearly are accelerating, but District analysts
believe that the general inflation rate will not accelerate over 2
percent this year. Price increases have been substantial for paper
and paperboard, gypsum board, aluminum, and electronic components—all being produced at near-capacity rates. University tuitions are
being boosted 8-10 percent. Electric and telephone utilities are
requesting very large rate increases, but natural gas rates may
level or decline because gas companies have "walked away" from high-priced contracts with suppliers. Rail and truck rates are expected
to move up, but airline fares are under downward pressure.
Labor Market Conditions
Increases in employment in the District are still mainly confined to
manufacturing. Unemployment is reported to be reduced substantially
in virtually all localities, but declines in estimated unemployment
have not been matched in most cases by increases in employment.
Motor vehicles account for the major share of the rise in
manufacturing employment, but even in that sector employment is far
below past peaks. Motor industry employment has not recovered as
much as unit assemblies of vehicles because of heavy overtime, more
automation (including robots), and increased use of imported
components. A large portion of the reported reduction in the number
of indefinite layoffs reflects deletions of workers who are no
longer eligible for recall. Scattered callback. of workers in
capital goods industries amount to only a small fraction of those
released during the recession. Most companies that have slashed
drastically their middle management staffs have no intention of
restoring these jobs. A very large bank, that already has reduced
employment by about 10 percent, plans a further reduction of similar
magnitude, in part by attrition.
Wages and Benefits
Companies that are increasing wages and salaries this year indicate
that such increases will average in the 5-6 percent range, down as
much as 50 percent from increases in some recent years. But some
firms are freezing compensation, and others are reducing wages and
trimming benefits. Wage cuts have been most general in meat packing,
with plant closings threatened if labor does not agree. The largest
food chain in the Chicago area recently announced a cut of about 20
percent in hourly rates to get labor costs more in line with fast-expanding "warehouse store" competition. This move abrogates a 21/2-year union contract signed only a few months ago. The union involved
is suing, but no strike action appears imminent. A widespread move
is underway by employers to slow the rapid rise in the cost of
medical benefits, which now often amount to $1,500 per year per
active worker—$6,000 in one company. Steps taken include increased
employee contributions, higher deductibles, switches to less
expensive plans, curtailed coverage, and requirements of "a second
opinion" before elective surgery.
Consumer Purchases
Sales of virtually all types of consumer goods and services have
been strong this year, often above expected rates. Major retailers
are boosting orders to suppliers to keep stocks at adequate levels.
Regional surveys indicate consumers are more confident of their
future incomes than at any time in at least five years. Improved
confidence, together with rising incomes and generally low
installment debt burdens, is unleashing pent-up demand that had been
building since 1979. Plans to buy cars are especially strong. Other
big selling lines include major appliances, furniture, and personal
and home computers. Demand for recreational vehicles and motorcycles
also has picked up, but is far below past peaks. Finally, consumers
are spending more on airline tickets and vacations.
Business Equipment
Output of mechanical capital goods, a major District activity, is
increasing on a broader front. Heavy trucks, truck trailers, and
associated diesel engines are scheduled at full capacity for several
months ahead. A large producer of earth-moving equipment is
recalling some laid-off workers as demand has increased and parts
inventories have been depleted. Most companies report export
business very slow, but a producer of huge mining shovels recently
won a Turkish contract, the largest single order in the company's
history. Orders for freight cars have been rising but only to about
25 percent of capacity. Demand for replacement parts is also up.
Three District producers of mobile construction cranes have been
phasing out their production activities, because of low demand and
severe foreign competition. Farm equipment sales have not picked up
as expected. Machine tool orders are increasing, mainly from the
auto industry. Overall, the District's capital goods producing
sector remains depressed.
Motor Vehicles
Assemblies of both cars and trucks in the first quarter will be far
above last year, and the highest for the period since 1979. With
demand strong and inventories of desired models low, this pace is
expected to be about maintained in the second quarter. Output is
restricted by availability of components, partly because of
rejection of parts that fail inspection. Domestic producers are
acutely aware that the quality "image" of their products is compared
unfavorably with that of vehicles from Japan, Germany, and Sweden.
Inventories of most Japanese cars are near rock bottom because of
import quotas.
Housing
The market for new and used homes improved sharply last year and has
been surprisingly strong in early 1984. Realtors report prices up 6-8 percent in the past year in good areas, with further gains
expected. The market is supported by first-time home buyers who had
deferred purchases in recent years because affordable financing was
not available. A wide variety of ARMs are now offered, but careful
reading of the "fine print" is advised. Some lenders are pushing 15-year amortized loans rather than ARMs.
Nonresidential Construction
Congressional delay in allocating funds for badly needed highway,
bridge, and mass transit projects could require postponement of some
projects until next year. Nonresidential private construction
activity in the District is dominated by a new wave of large office
buildings scheduled to start in the next several months.