May 6, 1985
Summary
Economic conditions in the Seventh District continue to trail the
U.S., but there are some bright spots. Output of autos and trucks is
scheduled at high levels in the second and third quarters, steel
output is rising, and commercial construction is vigorous. However,
orders for farm, construction, mining, and railroad equipment
continue at very low levels: demand for heavy trucks and trailers
has slowed: and the depressed farm sector has weakened further.
Residential construction is expected to about equal last year. Total
employment is flat, with new weakness in finance and medical care.
Except for autos, retail sales are lackluster. Permanent plant
closings continue to be announced in a variety of industries. Many
financially-stressed businesses are pushing efforts to control
costs, often with plant or office closings, hiring freezes and staff
reductions. The flood of imports adversely affects a broad spectrum
of industry, agriculture, and transportation.
Motor Vehicles
Further sizable increases in domestic auto and truck output relative
to last year are planned for the second and third quarters. Sales
continue strong helped by cut-rate financing on some models. Some
Japanese imports and favored domestic models are in short supply.
Car and truck makers plan large increases in capital spending for
major renovations and new plant construction. Several states have
been competing for new plants, domestic and foreign, offering tax
breaks and other benefits. Easing of Japanese restraints on auto
exports will affect investment plans and encourage foreign sourcing.
Steel
Production at District steel mills is rising, but remains short of
levels reached in the first half of 1984. Stronger demand for steel
is centered in cold rolled and coated sheets, especially for motor
vehicles, but also for appliance., office furniture, and light
construction. Orders from makers of heavy machinery are only
slightly improved. A Chicago area mill is running two shifts at its
structural steel facilities because of plant closings by competitors
in the East, South, and West. Domestic producers hope to benefit
from agreements being negotiated with major steel exporting
countries to limit shipments to the U.S. Steel makers continue
efforts to lower costs. One of the strongest District firms recently
announced plans to shrink capacity and employment substantially.
Capital Goods
Most District equipment producers still face weak markets.
Construction, farm, and mining equipment makers are still losing
money. Rail equipment orders remain very low. Orders for hoists and
indoor cranes have increased, from a low level. Few large outdoor
cranes are being produced. Machine tool orders are better, but still
far below good levels of the past. Competition from foreign
producers continues fierce, here and abroad. More U.S. capital goods
producers are shifting production to their foreign plants or are
sourcing abroad. Demand for automated warehouse facilities, which
offer large gains in productivity, is strong.
Farm Equipment
A leading farm equipment maker has agreed to sell its agricultural
lines, and will close two plants. Another major firm sold out
earlier this year. Tractor plant closings in District states,
apparently permanent, announced over the past 6 months cut industry
capacity by about half. Another producer plans a 6-month halt in
output of four-wheel-drive tractors to reduce inventories.
Transportation
Reported shipments by truck and rail have been running below last
year. This is believed to reflect a shift to owner-operator trucks
and private truck fleets. Demand for rail equipment remains very low
and sales of heavy trucks and trailers have been slipping. The huge
trade deficit has created an imbalance in ground transport, with
many trailers and freight cars returning empty to port areas.
Construction
Commercial construction, especially large office buildings in
downtown Chicago, is strong. with vacancy rates substantial, it is
believed that some of these projects are being pushed ahead to
qualify for tax incentives which may be altered. Heavy industrial
and utility construction are at very low levels. Residential
building appears to be rebounding from the effects of adverse winter
weather, but is still well below levels of the 1970s. Apartment
rents are rising about 9 percent this year. Apartment vacancy rates
are low, but new building is weak. Highway and bridge construction
is expected to continue very strong into 1986 as a result of release
of impounded federal funds.
Consumer Spending
Sales gains have recently been disappointing at some major District
general merchandise retailers. Inventories are being brought back
into line, often through price promotions. Orders for standard
appliances and recreational equipment have slipped below last year's
improved levels. Increases in general merchandise prices continue
small, around 2 percent over a year earlier. Consumer attitudes in
the District remain relatively optimistic.
Agriculture
Conditions in agriculture continue to deteriorate, depressing local
economies and industries dependent on agriculture. Prices of corn
and soybeans, major District crops, have fallen 20 to 25 percent
since the downtrend began last April. Surveys indicate large
plantings, which could bring another year of surplus production and
low crop prices. Livestock prices are down 12 to 15 percent from a
year ago, but are expected to rebound by summer. Agricultural
exports are expected to decline to a 6-year low. District farmland
values fell again in the first quarter, by 6 percent, and were off a
third from the 1981 peak, led by a decline of over 40 percent in
Iowa. Payments under new government farm programs, with high
enrollments in the District and the nation, will ease financial
strains for crop farmers.