September 16, 1984
Summary
Business conditions in the Seventh District appear less robust than
earlier in the year. Payroll employment, adjusted for seasonal
trends, has been about level since the first quarter. Steel output
declined in August contraseasonally. Farm income remains depressed
and farm equipment producers have scheduled extended plant
shutdowns. Demand for mechanical equipment, generally, has failed to
show expected gains. Retail sales improved in late August, but
merchants report intense price competition. Housing activity has
softened, but is holding up better than some realtors had expected
in view of high financing costs. Auto sales continue to be limited
by availability of preferred models. Lack of progress in the auto
industry's labor negotiations casts a heavy shadow over District
centers specializing in production of motor vehicles and parts.
Inroads of imports in markets for am ever-broadening spectrum of
consumer and producer goods present a serious threat to the
viability of many producers of goods.
Employment
Payroll employment in the five District states has increased only
half as fast as in the nation since late 1982. Compared to June
1979, employment in the five-state area was down 8 percent in
contrast to a 5 percent rise for the nation. Moreover, while the
national total continued to rise through August, District
employment, seasonally adjusted, has been about even since February.
Iowa employment showed a slight decline in the recent period and has
been below the level of late 1982. Despite strength in the auto
industry, employment in Michigan has been stable since February,
both in manufacturing and nonmanufacturing. Estimated unemployment
as a percent of labor force in the five-state area, while still
above the national average, has declined more than the national rate
since late 1982, implying withdrawals from the labor force. Iowa's
statisticians estimate its unemployment rate well below the national
average in the face of its poor economic performance. These
comparisons cast doubt on the use of unemployment rates as measures
of economic well-being for states and localities. Recent weeks have
brought new layoffs of hourly workers in steel, farm equipment,
autos, and construction components, and white-collar staff cuts in
manufacturing, financial services, and health care.
Steel
Operating rates in the District's steel industry were lower in
August than in July and trended downward through the month. This
development had not been anticipated last June. Since steel
consumption is believed to have held up, the decline in domestic
steel production is attributed to increased imports coupled with
reductions in user inventories. A larger proportion of steel going
to fabricators has been coning from steel service centers, rather
than direct from the mills, partly because of hand-to-mouth
inventory policies under which smaller quantities are ordered at one
time. A large share of foreign steel comes through service centers,
many of which are owned by foreign steel producers.
Farm Equipment
Through much of the first half of the year, District producers of
tractors, combines end other farm equipment clung to the belief that
the year would see modest increases in sales to farmers, perhaps 10
percent. However, sales have been disappointing all year and, in
July, were far below last year's dismal pace. As a result, extended
shutdowns of major plants have been announced, plants that had been
operating below 50 percent of capacity in some cases. In addition,
further substantial cuts in white-collar staff are planned,
apparently of a permanent nature. Reasons for poor sales of farm
equipment include depressed farm income, increased imports, and a
large supply of good used equipment, often disposed of at auctions.
Machine Tools
The Biennial International Machine Tool Show opened in Chicago on
September 5 for a nine-day stay. A thousand exhibitors and 100,000
visitors are expected, about the same as in recent years. The
upcoming show may have been responsible for some of the slowing in
orders for metal-cutting machine tools in June and July. Sales are
higher this year, but well below the levels of the late 1970s.
Moreover, a sharp uptrend in imports since then has increased the
share of market accounted for by imports from 20 percent to near 50
percent in 1984--over 50 percent for metal- cutting types. Some U.S.
producers are incorporating foreign components in their machines or
are offering complete foreign machines under domestic name plates.
Capital Goods—General
Demand for mechanical capital goods produced in the District, while
varying greatly by type, remains soft overall. Heavy construction
equipment is almost as weak as farm equipment. Sales of heavy-duty
trucks leveled off in late spring after a rapid rise. Bookings of
trailers, many of them tandems counted as two units, are still in
excess of capacity. Freight car deliveries in 1984 are now estimated
at 12,000, double last year's total, but only a fraction of the
90,000 shipped in both 1979 and 1980. Auto companies, recording
record profits, have sharply increased appropriations to buy
presses, machine tools, robots, and other items intended to update
facilities and reduce labor requirements. New plans by electric
utilities are at the lowest level in many years.
Auto Labor Talks
At this writing, chances of a settlement of the auto industry labor
negotiation before the September 14 contract expiration date appear
dim. On September 6, with only 8 days to go, the UAW named General
Motors as its "target" for concentrated discussions. Many large
issues must be resolved: wages, COLA, holidays, pensions, medical
benefits, mandatory overtime, outsourcing, job training and
retraining, and, perhaps most difficult, "job security" (guaranteed
employment). Reported profits of the big auto companies have been
huge, but analysts warn that funds are vitally needed for investment
in new facilities. Modern plants abroad have much lower labor costs.
Cars, small trucks and components from Japan are the main current
concerns, but major components also are coming from Mexico and other
nations in which U.S. firms have subsidiaries. Korea, with labor
costs well below those of Japan, is a potentially serious
competitor. The choice of GM as the target has significant
ramifications. With 350,000 union workers, a strike at GM would
exhaust the UAW's record strike fund three times as fast as a strike
at Ford with115,000. GM, with very low inventories of finished cars,
assembled 57 percent of the autos and 42 percent of the trucks
produced in the U.S. in the first months of 1984. Moreover, GM
produces a larger share of its components than Ford or Chrysler. A
long strike at GM would be reflected noticeably in total industrial
production and GNP. A 67-day strike against the company occurred in
1970.
Retail Sales
Sales of apparel and back-to-school merchandise picked up in late
August, helped by warm weather. Consumers have continued to purchase
major appliances at a record pace. Unlike autos, sales of appliances
have not been limited by availability. Retailers complain of intense
price discounting, especially from competitors trying to reduce
excessive stocks. After improving last year and early in 1984, sales
of recreational vehicles softened in the summer. General merchandise
prices average no higher than last year currently, a surprising
development to most analysts who had expected some increase. Credit
use (especially through bank cards) has been heavy, but delinquency
experience has been quite favorable.