October 23, 1985
Summary
Business activity in the Seventh District continues to lag the
nation, with Illinois and Iowa, the leading agricultural states,
particularly weak. Total employment in District states has risen
more slowly than in the U.S. over the past twelve months, and since
the turn of the year. Manufacturing employment has fallen more
sharply in this region since the January peak than in the nation.
Production of autos and light trucks, the only strong segments of
manufacturing in the region, will do well to hold at current levels
after the turn of the year. Chain store sales are somewhat improved,
but still disappointing. Construction backlogs indicate that
spending will stay near this year's much improved levels into 1986.
Office overbuilding and uncertainties related to possible tax
changes overhang these markets. Steel and most lines of mechanical
capital goods remain depressed. Prices in most wholesale markets are
under downward pressure. Inventories are generally low. So far, the
decline in the dollar has not significantly increased demand for the
region's manufactured goods, but analysts believe that a further
significant decline will have the desired effect. District
agriculture continues under severe financial stress. Large harvests
will keep farm prices down.
Employment
Job markets in the District remain weak. In August, nonfarm payroll
employment in the five-state region was 1.9 percent above last year,
compared with a 3.3 percent rise for the nation. Illinois was up
less than one percent and Iowa was down slightly. Manufacturing
employment has declined, particularly in Illinois, Iowa, and
Wisconsin.
Motor Vehicles
The unsustainable surge in auto deliveries from mid-August through
early October, mainly in response to cut-rate financing, largely
eliminated the overhang of 1985 models. Production plans remain
strong through year-end. Major automakers have extended less
generous programs of below-market financing into November. Analysts
expect very competitive markets for motor vehicles over the next
several years, with imports and domestic production of foreign
producers taking a larger share of the U.S. market. The decline in
the value of the dollar since February has somewhat reduced but far
from eliminated the foreign producers' cost advantage. Sales of
medium- and heavy-duty trucks have softened, and are expected to be
down next year. Mediums have held up this year better than heavies.
Several producers are scheduling 5.6% reductions in output for
October.
Steel
Producers of steel continue to operate at unprofitable levels. The
District's share of U.S. output has climbed somewhat in recent
months. OECD exporters to this country are adhering to restraint
agreements, but some others are not. Prices remain weak. Rising
investment by steel producers is to cut costs, improve quality, and
meet demand for particular types of steel, not to add to overall
capacity. Strongest markets for steel include autos, appliances,
office furniture, building components, and store fixtures. Most
lines of machinery remain weak. A larger share of steel is moving
through service centers, which aids user efforts to keep inventories
low.
Business Equipment
Demand for most types of heavy capital equipment, including those
important in the Seventh District, remains weak. Railcar orders are
low, though orders for auto carrying cars have increased. The farm
equipment market is dismal, and more layoffs of production workers
have recently been announced. Machine tool demand has improved,
particularly from auto makers and the defense industry, but remains
far below good levels reached in the l970s. Sales of pumps, widely
used in numerous industries, have increased from recession levels
but remain well below the 1981 peak, and have flattened in recent
months. A substantial further fall in the dollar's value in foreign
currency markets is estimated to be needed to provide much help to
makers of many lines of machinery. However, the rise in the Japanese
yen reportedly has spurred interest of potential buyers in
construction equipment of a major Seventh District producer.
Nonresidential Construction
Office building continues vigorous in the Chicago area, particularly
downtown and in rapidly growing suburbs, despite widespread concerns
about overbuilding. Construction of stores and rehab work also
remain strong. Some of this activity is believed to reflect efforts
to grandfather projects under existing tax incentives. Backlogs
indicate continued strength in nonresidential building well into
1986. Activity on large projects is limited by availability of
skilled workers and capacity to pour ready-mix, reduced during the
last recession. District-wide, nonresidential building contracts
this year have continued to recover from their 1982 low, but remain
well short of peaks reached in the late 1970s. Highway work is at
high levels in District states. Contract lettings in Illinois
earlier this year were the largest ever.
Residential Construction
Home and apartment building in District states in 1985 is slightly
ahead of a year earlier and nearly double the recession low in 1982.
The rise this year has been most pronounced in southeast Michigan,
reflecting continued strength in motor vehicles. Apartment
construction in the Chicago area is stimulated by low vacancy rates
and proposed reduction of federal tax incentives. Activity is also
up in Indianapolis, but has been flat to down somewhat from 1984 in
most other areas. Tighter FNMA regulations on mortgages are believed
to be constraining new construction somewhat. Despite improvement
since 1982, the pace of residential construction in the District is
less than half of the 1978 peak. In contrast, sales of used housing
are nearer to pre-recession levels. One of the largest Chicago-area
realtors reports a record volume of resales in recent months. Prices
have probably averaged between flat and up 3 to 4 percent over the
past year (no good statistics are available), but with wide
variation among areas.
Consumer Spending
Chain store sales in September and early October have been
disappointing but somewhat better than prior to mid-August. Demand
for durables has picked up. Apparel is slow, and would be helped by
cold weather. Inventories are normal, possibly somewhat tight in
some lines, in contrast with excesses which developed in late 1984
and early 1985. A high proportion of sales are on credit.
Delinquencies are high but are not deteriorating further. A large
area retailer reported that the decline in the value of the dollar
will not be reflected in higher prices charged to consumers until
mid-1986. Costs are "locked up" through spring. Japanese exporters
are absorbing about half of the impact of the lower dollar in
narrower margins.
Agriculture
Farm commodity prices remain very depressed, but crop prices may be
at or near harvest-season lows. Livestock prices have recently
recovered somewhat. Farm credit conditions continue to deteriorate.
Farmland values declined sharply again in the third quarter,
according to preliminary results from our latest survey of District
agricultural bankers. A recent action by the governor of Iowa allows
judges in that state to delay foreclosure proceedings against farm
real estate mortgages for one year. Whether such a moratorium can be
used against foreclosure proceedings initiated by Federal Land
Banks, the leading supplier of farm mortgage credit to farmers in
Iowa, is under debate.