September 8, 1987
Summary
Business activity continues to rise in the Seventh District, and
further expansion is expected. Total employment growth in the five
District states, seasonally adjusted, about matched that in the U.S.
during this year's first half. Chicago area help-wanted ads in the
first half were well ahead of a year earlier. Reports from this
bank's directors in August, overall were the most optimistic since
at least the early 1980s. District purchasing managers see continued
strong expansion.
In contrast, auto sales have remained persistently below last year and resulting production cuts and layoffs are particularly affecting industrial activity in southeast Michigan. Purchases of machinery have been mixed. Steel demand remains vigorous. Nonresidential construction activity, overall, appears about even with last year in the District, but has slowed in some areas. Residential construction and resales have slowed. Large District retail chain stores indicate only small gains in July sales compared with last year.
Purchasing Managers
Reports from Chicago and Milwaukee purchasing managers for July show
strong gains in production, orders, and backlogs, lengthening lead
times, and rising prices. Suppliers are increasingly able to make
announced price increases "stick." Reports from Chicago purchasers
in the first half of August indicate another strong month, with
orders up sharply.
Motor Vehicles
Temporary and indefinite auto production cutbacks and layoffs, in
response to continued slower sales, are having wider effects in
parts of the District where the industry is heavily concentrated,
particularly southeast Michigan. This slowdown is partly offset by
increased demand for trucks, including both light models bought
partly by consumers and larger trucks. Although Michigan
manufacturing employment in June was 3 percent below a year earlier,
the only District state to show a decline over this period,
nonmanufacturing employment there was 4 percent higher, a larger
gain than for the U.S. or the District as a whole. Lower Michigan
factory employment in the latest year mainly reflects auto industry
and related cuts. Sharply lower auto production in July reduced high
inventory levels closer to normal levels. Model year-end cut-rate
financing and rebates are expected to cut stocks further, though
reports indicate that consumer response has been restrained. A major
uncertainty overhanging District automakers is the outcome of labor
negotiations currently underway at GM and Ford.
Machinery
Markets are mixed for types of machinery with substantial production
in the District. Demand for diesel engines for use in trucks is
strong. Shipments of truck trailers have increased. Orders have
risen for diesels used in some other industrial applications. Orders
for railroad engines, however, are almost nil. Buying of railcars is
up, but still low. A steel producer reports higher demand from
makers of construction equipment and pressure vessels used in
chemical process industries. Machine tool buying is weak, but an
industry source views an upturn as imminent. Production of parts,
shifted abroad when the dollar strengthened in the first half of the
1980s, is being brought back to the U.S.
Farm Equipment
Unit sales of farm equipment remain sluggish, although concessional
terms to cut inventories strengthened tractor sales this summer.
Unit sales of farm tractors were 32 percent above the very low year-
earlier level in July, mostly reflecting inventory paring efforts by
a major District manufacturer. August sales are also expected to
show a large gain as another manufacturer introducing a new line is
offering discounts of up to 50 percent on a large inventory of old
models.
Steel
District sheet steel production continues strong. A contact
expressed concern about possible future shortages of some types of
sheet steel. Demand for structurals and bars remains at a high
level. Plate is on allocation, reflecting improved demand as well as
capacity shut down when the market was soft. In response, a large
Chicago-area plate mill is being restarted. Inventory rebuilding has
been an important element in the strength of steel markets this
year, following the six-month work stoppage at USX. However,
analysts disagree on the relative importance of restocking versus
improved final sales in the upturn in steel. Demand has improved
from various steel users. The fall in the dollar has made domestic
steel competitive with Japanese and European steel not only in U.S.
markets but also abroad, though American exports of steel are
restrained by trade barriers.
Nonresidential Construction
Work on new office buildings remains vigorous in downtown Chicago,
and more announcements of new buildings are expected. Several hotels
are underway or planned. Commercial building activity in suburban
areas has slowed considerably over the past year. Heavy August rains
and flooding delayed projects. A $225 million steel mill will be
built in Indiana, the state's second major new mill announced in the
past year.
Residential Sales and Construction
Markets for new homes and resales in the District slowed in response
to the jump in mortgage interest rates in the second quarter. Most
reports indicate that activity continues slower. Construction of
houses is expected to be at a good level for the year, but below
1986. Multifamily construction has fallen sharply due to adverse
effects of last year's tax law changes. The inventory of houses for
sale is low, suggesting that resales will continue below strong
1986. Chicago area housing prices are estimated to be 10-12 percent
higher than a year ago.
Consumer Spending
Large District retailers report small increases in the dollar volume
of sales in July, compared with a year earlier. Weakness continued
in early August. A survey of Illinois department and specialty
stores showed moderately higher July sales than a year earlier, but
smaller gains than earlier this year. The late Labor Day is expected
to shift sales from August to September.