May 6, 1986
Summary
Most contacts at District companies report improving conditions,
continuing a tread toward somewhat greater optimism. District
payroll employment has shown some expansion, but still trails the
U.S. performance. Purchasing managers in Chicago and Milwaukee noted
increasing production and orders in March. Other contacts note
growth in real estate transactions, residential construction, and
higher shipments of paperboard, cement, concrete, gypsum board,
basic and specialty chemicals, household appliances, and oil
products. There is increasing evidence of favorable results from the
lower dollar. Lower than expected sales or some auto models have led
to inventory accumulation and new sales incentives. Heavy truck
sales also are down, but sales of light and medium trucks remain
strong. Sales of RVs and tourism are expected to increase
substantially, boosted by the sharp drop in gasoline prices.
Mechanical capital goods remain depressed, but there has been some
rise in lighter construction equipment. Slower growth of federal
spending and flat capital spending, with weakness in oil/gas,
electric utilities, steel, and most machinery, are tending to offset
at least part of the positive effects on activity of lower energy
costs, reduced interest rates, and the depreciation of the dollar.
Analysts see increased evidence that the 5-year slide in District
farm real estate values will end later this year.
Paperboard
District analysts report "near-boom conditions" in the cardboard box
industry. Strength in this sector is not matched elsewhere. Supplies
are tight and operating rates high. Exports of linerboard are well
above last year, attributed to the lower dollar and renewed economic
expansion in Europe. Price increases of about 10 percent have been
announced by leading producers, with 6 to 7 percent expected to
"stick."
Motor Vehicles
Auto production plans have been revised down in light of excessive
inventories, but remain near last year's levels. Some assembly
plants have been closed temporarily in Michigan and Wisconsin.
Light-duty truck sales have softened slightly but remain near record
levels and output schedules are still above last year. Orders for
medium trucks have increased slightly in recent weeks. An industry
analyst expects sales of heavies to be down about 10% this year, but
sees sales of mediums about even with last year, rather than down as
expected earlier. Foreign competition is increasing for both medium
and heavy trucks.
Steel
Orders for sheet steel have slipped, after strengthening in the
first quarter, because of cuts in auto production schedules.
Production at Chicago and Detroit area mills, through mid-April, is
ahead of a year ago, but still at low and unprofitable levels. The
market for sheet is being supported by continued relatively high
demand for most autos, light trucks, and appliances. Demand for
structural steel and activity at service centers are vigorous.
Orders for machinery are weak. Shipments to the oil and gas
industries are virtually at a standstill, except for pipelines.
Capital Goods
Weakness in capital spending is evident in electric utilities,
machinery, steel, railroads, and water transport. A major electric
utility is seeking regulatory approval of higher rates which would
allow conversion of a stalled nuclear power plant to gas. No pickup
is evident in orders for diesel engines for non-truck markets. A
major District farm equipment producer has scheduled its North
American farm equipment output 14 percent less than its low 1985
level, and plans further cuts in employment. Smaller types of
construction equipment, paper-related equipment, and food processing
equipment are picking up moderately. Demand has revived for
electronic capital goods. The sharp decline in capital spending by
oil companies has less adverse effect in this District than
elsewhere.
Nonresidential Construction
Office building is slowing in the Chicago suburbs, but bidding
volume continues strong in downtown Chicago, with large new projects
announced. Commercial mortgages are readily available, with rates
under 10 percent, down about 150 basis points since the beginning of
the year. Life insurance companies are seeking more commercial
mortgages. Construction of industrial buildings in the 40-50,000
square foot range is picking up. Ground was recently broken for an
auto assembly plant in Illinois, a joint venture of an American and
a Japanese auto maker.
Residential Construction
Demand for new and used housing is vigorous, spurred by low mortgage
interest rates. Permits for new housing construction, for 3 months,
are up 40 percent or more from year ago in the District. Fixed-rate,
30-year mortgages are available below 10 percent. Most borrowers
want fixed-rate loans. New loans together with a huge volume of
refinancings have caused delays in processing loan applications.
Appropriately priced homes sell quickly, and home prices have risen
substantially in favored suburban areas.
Consumer Spending
A large general merchandise chain reports improved sales in recent
weeks, helped by mild weather. Inventories are described as flat.
Analysts are optimistic about demand through the rest of this year,
partly because of gains in spendable income associated with lower
energy prices and reduced mortgage payments. Credit sales have not
kept pace with total sales recently, and delinquencies are
approaching 1980 highs. The strong housing market, for new and used
homes, is boosting sales of appliances and home furnishings. Two
large national oil companies are abandoning retailing in the Chicago
area.
Agriculture
The District's winter wheat crop—which ranks a distant third to
corn and soybeans in terms of crop marketings—suffered considerable
winterkill damage. Wheat farmers will be able to offset some of the
loss by replanting other crops or using seriously affected acreage
to meet set-aside requirements. Favorable weather has permitted
District crop farmers to get an early start on spring fieldwork,
which may reduce subsequent weather stress. Bids from dairy farmers
that account for 5.4 percent of the District's milk production,
versus 8.7 percent nationwide, have been accepted for the
government's whole-herd dairy buy-out program. These dairy farmers
must liquidate their entire dairy herds within 18 months.
Anticipation of increased dairy cattle slaughter undermined
livestock prices in recent weeks. District farmland values, on
average, declined nearly 3 percent during the first quarter, to 17
percent below a year earlier and 45 percent below the 1981 peak, but
analysts increasingly believe the land market will bottom later this
year. Transactions in farm real estate are up, from very low levels
a year ago. But with heavy surpluses likely to continue in
agriculture, no bounceback in land values is expected.