January 28, 1986
Summary
Analysts in the District generally expect further moderate economic
expansion, nationally, in 1986. Our information on District
conditions suggests that this region will continue to trail the US.
Auto and light truck output will remain strong early in 1986. Heavy
truck sales and production have declined. Steel production continues
weak overall, but may be helped by tighter restraints on imports.
Weak demand has persisted for most types of mechanical capital goods
produced in the District. Construction, residential and
nonresidential, continues vigorous in the District relative to
recent years, but well below good levels of the 1970s. Backlogs will
support nonresidential building activity near recent levels well
into 1986. Consumer spending for general merchandise, through early
January, is viewed as disappointing. Although the District's
agricultural situation remains bleak, farm commodity prices have
risen in recent months from low levels, federal farm income and
price support programs have been extended, and the rate of decline
in land values has slowed.
Outlook for the District
Recovery in economic activity in the District has generally trailed
the U.S. over the past 3 years. This pattern appears likely to
continue in 1986. The star performer in the District, since the end
of recession in 1982, has been motor vehicles, but further expansion
in this sector in 1986, if any, probably will be small. Surveys
suggest that investment spending for capital goods produced in the
District will be sluggish in 1986. Steel production, heavily
concentrated here, may benefit somewhat if import restraints are
tightened.
Motor Vehicles
Auto production plans for early 1986 suggest a good level, about the
same as last year. But strong car sales increasingly are dependent
on cut-rate financing and other inducements, as in the current
round. One respected District analyst expects a small decline, about
2 percent, in total unit auto sales in calendar year 1986. Domestic
makers may experience greater pressure than this if the Japanese
"voluntary" quota on auto exports to the U.S. is enlarged or ended
after March 31. Truck sales have been setting records, but strength
is mainly in light trucks, with imports up most strongly. Sales of
heavy trucks have weakened in the last half of 1985, but may have
stabilized.
Steel
With inventories reduced to very low levels and imports below last
year, steel prices have been firming. The lower value of the dollar
and efforts to curb imports seem to be having some effect. Demand
for steel remains generally slow, with 1986 expected to be similar
to 1985. Strength is concentrated mainly in motor vehicles, light
construction, and service centers.
Capital Goods
Demand for most types of mechanical capital goods has remained weak,
but did not deteriorate further in 1985. An exception is farm
equipment, which continued to decline. In 1986, cuts in capital
spending are expected for electric power generating equipment,
mining equipment, and oil and gas development. Sales of food
processing machinery have picked up slightly. A new wave of paper
plant construction is reported to be getting underway.
Nonresidential Construction
Construction activity in the District was hampered more than
normally in November and December by bad weather. Contract backlogs
for commercial buildings, highways, and apartments are large in the
Chicago area. This work is proceeding in 1986. Demand for Chicago-
area smaller manufacturing buildings has about exhausted the
overhang of good, well-located unsold units. Among District states,
the rise in nonresidential construction contracts in 1985 was
strongest in Michigan, while Iowa showed essentially no growth.
Nonresidential construction in the District is still well below
levels of the late 1970s, compared with an increase in the U.S.
Residential Construction
Housing construction continued to increase in most District centers
in 1985, while the U.S. probably was flat to down slightly. But the
pace of residential construction in the District as a whole is only
about half of good levels of the late 1970s. In recent months,
expansion has been strongest in Michigan, while activity has slipped
further from low levels in Iowa. Existing home sales have been
vigorous in the Chicago area, with little price appreciation. Fixed-
rate, 30-year mortgages are being quoted by Chicago-area lenders
with nominal interest rates as low as 10 1/2 percent, low compared
with levels of the past 6 years. Adjustable-rate loans are being
offered with first-year rates down to around 8 1/2 percent.
Consumer Spending
Large District retailers report that December sales, on a same-store
basis, were flat to up slightly. An industry analyst described
December and early January sales as disappointing and slow.
Inventories have been kept low, and sales may have been hampered as
a result. Catalog stock-outs were high (in-store sales lost due to
low stocks cannot be measured). Appliance sales have been strong,
especially home laundry, ranges, and refrigerators. Sales of
microwave ovens, which have soared in recent years, are believed to
have peaked in 1985. Inventories of appliances are in good balance
except for a sizable stock of room air conditioners left over from a
cool summer. Airline fare wars have intensified, with little
response in terms of added traffic.
Agriculture
Recent developments have cast a more favorable light on an otherwise
bleak picture for the District's agricultural sector. Federal
legislation enacted December 23 extends farm income and price
support programs for five more years and paves the way for financial
assistance to the troubled Farm Credit System. Problems in the most
troubled district of the FCS—Omaha, which serves Iowa—apparently
have eased. Farm commodity prices, although still at low levels,
have been on an uptrend in recent months. Crop prices in particular
have been buoyed by record movements of grain under federal price
support loans and by weather-related crop setbacks in the Southern
Hemisphere. Land values in the District continued to decline in the
fourth quarter, but the rate of decline apparently slowed. Observers
increasingly believe land markets may bottom in 1986.