March 12, 1985
Summary
Conflicting trends in the Seventh District suggest that overall
improvement, if any, in this region in 1985 will again lag the
national performance. With total payroll employment still 7 percent
below the levels of 1978-79, job seekers far outnumber openings.
Severe distress is reported throughout the Cornbelt, with many
farmers complaining about availability of credit "to get crops in
the ground." Depression in the farm sector is unprecedented since
the 1930s. Producers of mechanical capital goods face very weak
markets with more plant closings announced and anticipated,
especially in farm and construction equipment. On the favorable
side, motor vehicle output is scheduled above last year's high level
in the first and second quarters. Steel output is improving, helped
by new import controls. Commercial construction activity is
vigorous, but both residential and nonresidential construction
remain substantially below the levels of the late 1970s. Reports on
consumer purchases vary, but retailers are pushing hard for
available trade, with profit margins thin at best.
Plant Closings
Various District manufacturers have announced further plant
shutdowns, some temporary, others permanent. A diversified firm will
permanently close a construction equipment plant in Iowa. A meat
packer will close two pork processing facilities in Iowa. A producer
of large farm tractors is shifting operations to Europe from
Michigan. A large Detroit brewery, dating to the nineteenth century,
is to be closed. Reasons for plant closings include excess capacity,
severe competition, the high value of the dollar, and antiquated,
high-cost facilities.
Motor Vehicles
Auto sales in January and February have been vigorous and production
schedules through mid-year exceed 1984. However, cutbacks have
occurred in output of some small cars, and several companies are
offering cut-rate financing to boost sales. While auto producers
have been placing orders for steel to support planned output through
April, they retain flexibility to lower schedules later in the
second quarter. Industry observers see extension of current
restraints on Japanese imports as unlikely, but less formal
"guidance" may mean only moderately higher imports. A leading truck
producer expects sales of medium trucks to rise 5 percent in 1985,
with sales of heavy trucks to be near 1984's high level, but weaker
in the second half.
Steel
Raw steel production in the Chicago area has improved in recent
weeks to the highest levels since mid-1984. More furnaces have been
lit and more workers recalled. Orders for most types of steel have
improved "fairly sharply." Strongest lines are motor vehicles,
appliances, office furniture, and commercial buildings. Demand for
steel from heavy capital goods producers is still slow. New import
restraints are taking hold. Foreign steel inventoried when imports
surged last year probably is being drawn down. One analyst expects
the restraint program to reduce imports by 5 million tons from
l984's record 26 million tons.
Capital Goods
Most heavy capital goods lines remain weak, partly because of the
high value of the dollar. Orders for construction machinery, food
processing, materials handling, and oil and gas exploration
generally continue slow. Railcar orders have slipped from low levels
in last year's first half. A District company which sold its
domestic farm equipment lines is liquidating finished inventories,
offering large bonuses to dealers. Another diversified company is
seeking a buyer for its farm machinery business.
Gypsum and Paper
Gypsum board demand in 1985 is expected to remain near 1984's record
level. Capacity in this industry has been shifting in recent years
to the South and West as older plants have been closed and new
plants opened. However, repair and remodel work—one-third or more
of the market for gypsum board—is concentrated in regions with more
older buildings, the East and Midwest. Paperboard shipments are
projected to rise two percent in 1985 from the 1984 record. Industry
output is near capacity.
Construction
Bidding activity on nonresidential projects, especially office and
retail, in the Chicago area is vigorous, and activity should remain
strong in 1985. Highway work also is projected to continue at a high
level, depending in part on release of federal funds. The decline in
mortgage interest rates since mid-1984 has improved the climate for
new housing, but some lenders have raised rates recently. With the
wide variety of mortgages now available, some speak of 100
varieties, generalizations about terms are difficult.
Consumer Spending
Reports on general merchandise sales recently have been mixed, but
mostly disappointing. Airline passenger miles were up 12 percent in
January from year ago. Fare cutting has intensified since then. A
Chicago-based regional airline recently cut flights by one-fourth,
froze pay, and announced layoffs.
Agriculture
District farmers expect to plant about the same acreage in corn and
soybeans in 1985 as last year, according to the USDA February
survey. The report attracted more interest than usual because of
concerns that many farmers will be hard pressed to obtain sufficient
production financing. Some analysts argue that current financial
stress undermines the reliability of this year's planting intentions
report, which historically has been fairly reliable.