September 10, 1986
Summary
The Seventh District's economic performance continues to lag the
nation, with no evidence of either a drop-off or an acceleration in
the pace of overall activity. Total employment in the five District
states has been about flat since early this year, with losses of
manufacturing jobs about equaled by increases in other sectors.
Consumer spending and residential building continue relatively
strong. However, domestic automakers recently pared production plans
as inventories of some models became excessive. Commercial
construction continues at a high level, but important new projects
have been postponed indefinitely. Most lines of mechanical capital
goods remain weak. Labor disputes have cut output of steel and
construction equipment. Bumper grain crops are exerting downward
pressure on prices, and are expected to strain available storage
capacity.
Labor Negotiations
Labor-management negotiations in the District in 1986 have been more
prolonged and heated than in recent years in steel, construction
equipment, meat packing, building trades, and local government.
Workers in distressed industries are strongly resisting pay and
benefit cuts. Unions are demanding job security guarantees.
Managements are pushing for changes in restrictive work rules. Work
stoppages have halted production to a greater extent than in recent
years. USX, with a major plant in Gary, Indiana, was shut down
August 1 after labor rejected a management proposal to cut wages and
benefits substantially. The union called the shutdown a lockout
after USX rejected a union offer to work under terms of the old
contract while bargaining continued. Where courts agree with the
union position, workers are eligible for unemployment compensation.
Deere, the leading farm equipment producer, closed all its farm
equipment plants (mainly in Illinois and Iowa) after three
facilities were struck. Farm equipment inventories are described as
larger than normal. A strike at a Caterpillar parts plant caused
layoffs at other facilities. A strike by Detroit municipal workers
was settled in early August, after 19 days.
Steel
The strike at the USX Gary Works has cut steel output in the
District sharply, and shifted orders to other producers. One
District steelmaker is operating at 35 percent of capacity, compared
with the low 50's for the industry. Cold-rolled sheet orders have
been extended 6 to 8 weeks beyond normal leadtimes at this producer.
Encouraged by the USX strike, several large steelmakers announced
selective price increases. Demand for steel has increased this year
for appliances, furniture, construction, and grain storage
facilities. Buying of steel by the auto industry is about 5 percent
below last year. Steel for oil and gas, and for the railroads, is
off sharply.
Capital Equipment
Output of mechanical capital goods is generally weak, even below
last year's low level. Farm equipment output was extremely low, even
before the Deere strike, with good used equipment in ample supply.
Sales of replacement parts, to keep existing agricultural equipment
operating, are described as good. A leading producer of industrial
robots is cutting employment due to cancellations of orders by
automakers. Railroad equipment output continues at a very low level.
Oil and gas equipment output has fallen near zero. Two manufacturers
of diesel engines, faced with depressed demand, recently announced
an agreement to combine those operations. Some types of construction
equipment have improved, supported by strong residential and highway
work. The latter consists mainly of repair and upgrading of existing
routes. Reports indicate that defense equipment orders come in
spurts, but apparently are increasing overall.
Motor Vehicles
Sales of cars and trucks are near last year's high levels, supported
by cut-rate financing as low as 2.9 percent and rebates from
domestic producers, with imports accounting for a larger share of
the market. A credit union trade association is asking the FTC to
determine whether below-market financing programs of the automakers'
captive finance companies constitute unfair competition. Domestic
car and truck makers have scaled back production in the current
quarter from earlier plans through temporary plant closings and
slower line speeds. Light truck sales are still strong, particularly
imports. One industry analyst projects sales of medium trucks in
1986 slightly ahead of last year, but expects sales of heavies to be
down 12 percent. Sales of both mediums and heavies in 1967 are
expected to be near 1986 levels. Competition is fierce for heavies,
with prices below last year and at unprofitable levels. Further
consolidations and employment cuts by heavy truck makers are
expected by analysts. There is an unusually large supply of good
used truck tractors and trailers, partly reflecting the sharp
increase in failures of trucking firms under deregulation.
Nonresidential Construction
Commercial construction activity in major District centers remains
at a high level. But a large amount of prime office space in the
Chicago area, downtown and in suburban centers, is vacant with more
coming on the market. Some major projects have been delayed awaiting
anchor tenants. Furthermore, proposed tax treatment of "passive
income" is said to be discouraging equity investors. Demand for
suburban office space is up from last year. There has been some
pickup in the Chicago area in construction of strip shopping
centers, small industrial warehouses, and a variety of smaller
business projects.
Residential Construction
Housing construction and resales continue at good levels in many
parts of the District. Residential building permits for 7 months are
27 percent above last year in the District states, versus a rise of
7 percent for the U.S., with particularly large gains in the
Chicago, Indianapolis, and Milwaukee areas, and in parts of
Michigan. Average prices of homes in the Chicago area rose 12
percent in the first 6 months of this year, according to a realtor's
analysis, with increases of 15-20 percent reported in favored
suburbs. Similar increases have been reported for portions of the
Detroit area. Rates on 30-year fixed-rate mortgages have fallen to
about 10 percent, according to a survey of Chicago-area lenders,
down from 10.6 percent in mid-June. Despite improvement, residential
building in the District as a whole is still well short of the pace
of the late 1970s. Shortages of skilled tradesmen--including
bricklayers, carpenters, and drywall installers--are reported in the
Chicago and Detroit areas. One District lender describes several
steps taken earlier this year to restrain loan applications
(including refinancings) which had overwhelmed processing capacity.
These included higher application fees, elimination of rate lock-
ins, and higher mortgage rates. A newspaper survey points to a 5-10
percent rise in apartment rents this fall.
Consumer Spending
Most large general merchandise chains reported seasonally adjusted
dollar sales records in July. Strongest lines have been appliances
and home furnishings. Hot weather in July boosted sales of air
conditioners and apparel. Credit sales continue to account for a
near-record share of total sales at one large chain. Delinquencies
have declined since spring, but remain relatively high. With
inventories described as moderate, the improved pace of sales is
expected to stimulate orders to suppliers soon. Airline traffic is
very strong, helped by discount fares.
Agriculture
District crop prospects remain excellent. Record per acre corn
yields are forecast in each of the five District states. Three of
the states are likely to reach new highs in soybean yields. Abundant
harvest prospects and record stocks from previous harvests threaten
a storage crunch this fall. This has triggered a flurry of activity
for bin manufacturers. The prospective shortage of storage space has
pushed grain prices down further as farmers, leery of even lower
prices when the large crop is harvested, sell existing stocks to
make room for the new crop. A change in government regulations
permitting increased use of temporary storage facilities will ease,
but not eliminate, the distortions that arise from a storage crunch.