January 30, 1985
Summary
The flat trend which has characterized economic activity in the
Seventh District since last spring continues in early 1985. However,
analysts with District firms do not anticipate a recession. Despite
robust auto and truck sales and output, most sectors important here
are about holding even, some at very depressed levels. There is
little hope that the gap in the region's performance relative to the
nation that developed in the 1980s will be ameliorated in the near
future. Total employment has barely increased since last spring, and
some lines, including farm, construction, and mining equipment,
medical care, and financial institutions have cut staff and/or have
scheduled extended layoffs. Continued gains in the value of the
dollar have defeated strenuous cost-cutting efforts of District
producers to regain a viable position relative to foreign
competitors. Steel output ended 1984 at a low level, and District
steel producers anxiously await effective agreements to restrict
imports. Sales and orders for heavy trucks and trailers have
softened from the good level of last spring, but remain fairly high.
Office and commercial construction prospects in the Chicago area
remain vigorous, probably because of favorable tax treatment.
General merchandise sales in late 1984 disappointed some large
chains, and price cuts to move excess stocks have adversely affected
profits. Price competition in cement, steel, paperboard, oil
products, and airline fares is also intense. Depressed conditions in
District agriculture are increasingly burdensome. Farmland values
declined 5.5 percent in the region in the fourth quarter, and are
down 27 percent from 1981 highs, with further declines probable.
Labor Markets
Jobs are hard to find in the Midwest. Through November, total
payroll employment in the five-state area had risen less than 4
percent (S.A.) from the recession low in December 1982, and less
than 1 percent since last April, only half the U.S. rate. Reports of
new layoffs, extended shutdowns, help-wanted ads, and reports of
hiring intentions suggest no improvement since November.
Manufacturing employment has been about unchanged since last spring,
while growth of nonfactory jobs has been very small. Despite
favorable press reports by university PR departments, many of last
year's college grads, often with good records from top-rated
schools, have failed to find suitable employment. Others hired in
recent years are out looking again. Job freezes and efforts to cut
surplus staff are almost universal, including state/local
government, hospitals and medical supply producers, commodity
dealers, and financial institutions-sectors that were hiring
steadily in the 1970s. As a result of the collapse of the video game
craze (with output centered in Chicago) employment in area firms has
dropped from 7,000 to 1,400 since 1982. A recent report of 100 job
openings at the main Chicago post office caused a mob scene of
thousands of would-be applicants. Wage freezes and give-backs, often
fiercely disputed, are occurring in a number of sectors, especially
meat packing and food retailing.
Capital Equipment
Construction and farm equipment producers remain under severe
stress, with an historic consolidation and retrenchment underway.
Output of farm equipment in 1985 is expected to fall from very low
levels, even if sales hold up, because inventories of a leading
producer will be liquidated. Very weak mining activity means
virtually no demand far equipment. Industrial markets for diesel
engines (except trucks) remain soft. Competition from foreign
producers, in domestic markets and abroad, remains a severe problem
for a wide range of producers, in large part because of the high
value of the dollar, but also because of poor sales worldwide. The
leading construction equipment producer (with a commanding position
worldwide a few years ago) has had three straight loss years and
laments "our dramatic cost reduction efforts are being offset by the
soaring dollar". Most investment is heavily oriented toward quality
assurance and elimination of jobs. Often machines and components for
these programs are imported.
Motor vehicles
Auto sales improved in December as shortages of popular models
eased. Further inventory building is planned in the first quarter of
1985. Major producers expect small gains in sales in 1985 from last
year's high level. Auto industry employment remains well below 1978
levels, but new workers are being hired "off the street" at some
District plants for the first time since the late 1970s, as workers
on extended layoff have been rehired or exhausted their eligibility
for recall. Orders for heavy trucks and trailers have slipped
somewhat since last spring, but remain high. Heavy truck sales in
1984 were 80 percent higher than the recession low in 1982, but well
below the 1978-1979 pace. Deliveries in 1985 are expected to be near
1984 levels.
Steel
Fourth-quarter steel output at District mills was lowest in 1984,
and output fell more than usual at year-end as customers sought to
cut inventories. A small rise in steel consumption is expected in
1985. Steel for motor vehicles will remain at high levels, and bids
on fabricated steel for office buildings continue vigorous. Orders
from equipment manufacturers have increased only moderately.
Questions regarding the timing and effectiveness of "voluntary"
import restrictions overhang the 1985 outlook for domestic
production.
Nonresidential Construction
Contracts for nonresidential building (floor area, F.W. Dodge) in
the five states were up 33 percent in 1984 from a year earlier, but
36 percent below 1979. The U.S. total was up only 19 percent, but
within 13 percent of 1979. A surprising number of large office
buildings are under construction or planned for downtown Chicago,
and office and retail development continues vigorous in high-growth
suburbs. Commercial construction activity may be artificially
stimulated by the possibility that rapid depreciation for tax
purposes will be ended. Car and truck makers plan new plants, mainly
in Michigan and Indiana, with states and municipalities competing in
offering costly incentives to promote local sites. Rehabilitation
work continues at a strong pace, also encouraged by tax breaks.
Highway improvement work is expected to rise through 1985 and into
1986, largely depending on federal fund allotments.
Housing
Permits for District residential construction slipped in the second
half of 1984. Declines in mortgage rates since mid-1984 improve
prospects. In 1984, housing construction permits in the five states
were up 11 percent, but were down almost 60 percent from 1977. Used
home sales held up well in late 1984, aided by lower mortgage rates.
Retail Sales
General merchandise sales in December and early January were mixed,
but mostly below expectations. Discounters performed best.
Inventories are excessive despite reduced orders starting last
summer. Aggressive markdowns have been common. The share of sales on
credit has leveled, after rising in recent years. Delinquencies are
up, but not "dangerous". Appliance sales were at record levels last
year, led by a 55 percent surge in microwave ovens, half of which
are imported.