May 4, 1988
Summary
Business activity has continued to expand in the District.
Employment growth in the year through February was about even with
the nation, apart from sizable cuts at Michigan auto and parts
plants and in related manufacturing industries. Chicago purchasing
managers reported further increases in output and orders through
March, accompanied by longer delays in deliveries of goods ordered
and widespread price increases. However, a large diversified
manufacturer reported that increases in prices paid for its inputs
recently have been less widespread. Contacts see strength in orders,
production, and shipments across a range of manufacturing
industries. Firms in the District continue to gain from the fall in
the dollar since early 1985, both in competition with imports and in
export markets. Although some companies in this region face loss of
business due to military spending cuts, defense procurement is more
heavily concentrated in other regions. Employment cuts aimed at
increasing efficiency continue to be reported. Farmland values in
the District rose further in the first quarter.
Motor Vehicles
With auto inventories back in line with sales, following production
cuts and a sales upturn in the first quarter, domestic car
manufacturers plan to boost second and third quarter production
above a year earlier. Truck sales continue robust, and second shifts
are being added at two pickup truck assembly plants in the District.
A maker of medium and heavy trucks has raised its sales forecast for
the year. Export markets for heavy trucks are reopening. Auto makers
are predicting total motor vehicle sales this year only slightly
below the 1987 pace.
Steel
Order books at steel mills in the District are full for the second
quarter, and the third quarter is being booked. Small steel users
report an inability to get firm price quotes and delivery dates. The
stronger-than-expected auto market has improved the outlook for
shipments of steel this year to motor vehicle manufacturers. Demand
for structural steel is very strong, reflecting in part the upturn
in construction work on factories. Japanese auto and parts plants
under construction in the U.S. are reported being pushed toward
rapid completion. Investments in paper plants, heavy users of steel,
are increasing. Steel fabricators are backlogged into the third
quarter and in rare instances the fourth quarter. Buying of steel by
equipment makers has strengthened further. Steel service center
business continues strong. Inventories are thought to have been
rebuilt to desired levels at some service center customers whose
stocks were low.
Machinery
Demand has strengthened for numerous types of machinery. A supplier
of components to equipment manufacturers reports stronger demand
across a range of industries. Capital spending is described as
"booming." Export orders continue strong. A large machine tool maker
reports very favorable sales prospects, helped by the lower dollar
which has contributed to reduced import penetration. Orders for
construction equipment have risen substantially. Buying of food
industry machinery is said to be doing well, and special industry
machinery is up moderately. Sales of farm equipment this year have
been sharply above the depressed year-earlier pace.
Construction
Residential construction contracts (in square feet) and shipments of
building materials—concrete, cement, and gypsum board—in the first
two months of 1988 were well below a year earlier in the five
District states. More normal weather and resulting construction
delays, after last year's exceptionally mild winter, may have
accounted for a large portion of the decline. However, the decline
may also be a result of many desired purchases of new or upgraded
homes having been completed in recent years; the small number of
listings of existing homes with Chicago-area real estate brokers is
viewed as evidence of this. Mortgage interest rates have been
relatively favorable; fixed-rate 30-year loans were offered in the
first quarter at interest rates as low as 9.5 percent (plus 3
points), though they have since generally risen to 10 percent or
higher. First-year interest rates on adjustable-rate loans are also
edging up in the Chicago area, from around 7 percent to 7.25
percent. Nonresidential building contracts in the District states
were modestly higher in total reflecting increases in Indiana and
Wisconsin. Industrial construction will be higher this year,
including work on steel mills in Indiana, paper plants in Wisconsin,
and warehouse facilities around Chicago. Public works projects,
large and small, are also expected to be strong. Prices of some
construction materials have fallen reflecting slower markets,
overall, and ample capacity.
Consumer Spending
Retailers in the District reported mixed results for February and
March, attributed to weather and the early Easter. A survey of 243
stores in Illinois and northern Indiana showed sales in February 2
percent below a year earlier. However, sales in February 1987 were
strong, reflecting the warm weather. Retail inventories are viewed
as in good shape. Credit delinquencies have been falling.
Agriculture
Our latest survey of agricultural banks shows that farmland values
rose further in the first quarter. District land values, on average,
were 3.5 percent higher at the end of March than at the end of 1987,
and 11.5 percent above a year earlier. The largest increase was in
Iowa, where farmland values averaged 19 percent higher than in March
1987. Little or no increase was reported for Michigan and Wisconsin
land values over the past year. Farmers in the District plan to
increase planted acreage this year by 3 percent for corn and 2
percent for soybeans. Spring field work in most areas of the
District is behind the accelerated pace of the past two years, but
ahead of normal.