December 5, 1984
Summary
Total business activity in the Seventh District has been about
stable since early this year, having flattened earlier than in the
nation. Most District reports suggest relative stability in the
months ahead, but concern has been growing that a general
deterioration is underway. Auto production has returned to a high
level, but only slightly above last year. Steel output has improved
since late September, but remains well below the first half rate,
and below break-even levels. Machine tool orders are up, mainly from
the auto industry. Heavy construction and farm equipment makers,
faced with weak markets, are selling off units and closing marginal
plants. Cutbacks are occurring in the important health care
industry, reversing a long-term expansion. Container loadings on
flat cars, which had slowed earlier in the year, slipped
significantly in November. Demand for most mechanical capital
equipment remains weak. Sales of heavy trucks and trailers have
softened recently from high levels. However, surveys show sizable
additions to capital outlays next year by the auto and steel
industries. Many lines of seasonal retail merchandise are reported
moving well, but the 2-year boom in consumer hardgoods apparently
has run its course. Retail inventories are viewed as excessive,
encouraging price markdowns. Recent declines in paperboard demand
partly reflect reduced orders for general merchandise. Residential
construction continues to weaken, while nonresidential construction
is expanding. District farmers, many in distress because of heavy
debts and weak prices, continue to restrict purchases.
Recession Fears
The plateau in District activity since last spring, coupled with
recent declines in factory orders and freight movements, raises the
question of an imminent recession. Pressures to reduce or hold down
inventories are intense. Our contacts with industries important in
the District generally expect relative stability during the rest of
1984 and early 1985—but no precipitous decline. However, some
company analysts are warning their managements that the situation is
fragile and that a general decline, rather than renewed expansion,
is the more likely development.
Motor Vehicles
Auto makers are planning production at a high level through next
year's first quarter, but with only small gains from year-earlier
levels. Weaker auto sales in recent months reflect shortages of
popular models. Strikes, unrelated parts shortages, and import
quotas have limited supplies. Large "availability" premiums are
reported on some models, recalling the situation after World War II.
Steel
Steel production in the Chicago and Detroit areas has improved
somewhat from September lows associated with heavy imports, the auto
strike, and inventory cutting. However, output remains well below
the first half pace. Increasingly. imports have penetrated Midwest
markets. usually through steel service centers, often owned by
foreign steel producers. Fourth quarter shipments are expected to be
about even with the third quarter, in contrast with a normal
seasonal rise. Local analysts have lowered estimates for total U.S.
mill shipments to around 74 million tons. Next year's shipments are
expected to be helped by the Administration's import restraint plan,
retroactive to October 1.
Capital Equipment
Many capital goods manufacturers with production facilities in the
region are restructuring and downsizing operations. A major heavy
construction equipment producer plans to close five plants. Other
firms are consolidating divisions and laying off workers. Producers
of most mechanical capital goods face intense competition from
abroad in U.S. and foreign markets. Some farm equipment suppliers,
long-time leaders in their fields, are selling or writing off money-
losing divisions. Farm equipment sales, weak last year, have
softened further. Some other types of capital goods, for oil and gas
development, materials handling, food processing, and railroad
transportation, have improved but from low levels. Easing of orders
for heavy trucks and trailers, in strong demand earlier in the year,
is expected to reverse when regulations on size limits and routes
are clarified. Surveys show further growth in capital spending next
year, with sizable increases in outlays by the auto industry and
steel.
Retail Trade
General merchandise sales in the District have been mixed in recent
months, with good gains for some discounters and declines,
seasonally adjusted, at other chains. Large appliance sales are at
record levels, but the vigorous two-year expansion has lost
momentum. Furniture demand also has slowed. However, small "traffic"
appliances, toys, and other gift items are moving well, raising
hopes for a good Christmas selling season. Consumer attitudes,
measured in the region, remain optimistic. Inventories are widely
viewed as excessive. Markdowns are frequent. Some general
merchandise chains have cut back orders. This helps account for an
easing in paperboard demand, after an 18-month expansion. Prices on
average are about stable and little changed from last year.
Residential Construction
New housing construction in the region has weakened since about
midyear. Despite sizable declines in mortgage interest rates since
then, area lenders report softer loan volume. However, with lower
rates, the outlook is somewhat improved. Fixed-rate loans are
accounting for larger share of the total, due to higher standards on
adjustable rate mortgages and a narrower "spread" between rates on
fixed- and adjustable-rate loans. Permits for residential
construction in District states are 68 percent above the low 2 years
ago for nine months, but 58 percent below the peak in 1977.
Nationwide, permits are up 80 percent from 2 years ago and only 8
percent below the 1978 high.
Nonresidential Construction
Office and retail construction continues strong in the Chicago area.
Total nonresidential building contracts this year in the five
District states (F.W. Dodge data, in square feet) are up nearly 60
percent from 2 years ago, but still more than 40 percent below good
levels of the 1970s. The backlog of public works projects is
growing—mainly highways, bridges, water and sewer. The amount of
road and bridge work next year will depend on resolution of a
political impasse in Congress which is delaying release of
accumulated funds.
Agriculture
Following rain-caused delays, the District farm harvest is finally
drawing to a close. Corn and soybean prices remain well below year-earlier levels, keeping farm income low. Despite average domestic
harvests, record crop production world-wide is forecast for 1984-85.
This may dampen the expected recovery in U.S. grain exports. Meat
output is down from last year, but above earlier forecasts, largely
reflecting increased broiler output. Milk production is running
about 4 percent under last year, partly because of federal payments
to farmers to cut output. The milk surplus also has been trimmed by
higher consumption. Dairy farmers apparently are poised to expand
output when the paid diversion program ends in March.