June 15, 1988
Summary
Expansion is continuing in the Seventh District, paced by strong
exports and rising capital spending. Total employment growth in the
District states so far this year has been in line with the nation.
Purchasing managers in Chicago, Indianapolis, and Milwaukee reported
strength in activity at their companies. The vigorous pace of
activity in the industrial sector reflects the rise in demand for
equipment. Orders for steel have been boosted by the expanding
equipment markets as well as strength in motor vehicles and an
upturn in industrial construction. Office construction, at a high
level, may slow somewhat, and further slippage is expected in
apartment building. Retail sales have been mixed. Conditions in the
farm sector have continued the upturn that began last year, but
persistence of a lack of rainfall could cause considerable damage to
crops.
Manufacturing
Industrial firms in the District continue to report vigorous demand,
in part reflecting the lower dollar and stronger capital spending.
Manufacturers indicate sizable gains in shipments abroad, and some
are exporting products previously sold entirely to the domestic
market. This increased business is boosting demand at firms
providing related services such as freight forwarders, foreign trade
consultants, and banks. Makers of components used in a wide range of
machinery indicate sizable increases in sales, ranging from 10
percent to 30 percent above a year earlier for various lines.
Purchasers placed on allocation are reported to be double ordering,
as are others concerned about problems with availability of
materials, parts, and supplies. Customer inventories have been
increased to guard against problems in obtaining supplies. Steel
mills in the District remain at capacity. Strength in steel orders—booked into next year according to a source at one modern mill—reflects the upward adjustment in auto production plans, the record
pace of truck output, stronger markets for industrial and farm
equipment, an upturn in construction work on factories, and a
continued high level of work on other types of construction.
Motor Vehicles
Sales of motor vehicles continued at a healthy pace in May. Domestic
trucks have shown particularly strong gains, and appear headed for a
record year. Two pickup truck assembly plants in Michigan are adding
second shifts. Some heavy truck makers are not scheduling vacation
shutdowns this summer. A Michigan auto assembly plant is adding a
second shift to help meet demand for cars, and the scheduled closing
of the Kenosha, Wisconsin, plant is being deferred until early 1989.
Planned auto assemblies through September are above year-earlier
levels.
Construction
The pace of construction activity in the District, overall, is
expected to remain relatively high in 1988, but appears to be
slowing. Contracts for construction of nonresidential buildings in
District states through April were 2 percent lower (in square feet)
than a year earlier, and residential contracts were 19 percent
lower. The decline in housing was sharpest early in the year,
reflecting unseasonably strong construction starts in early 1987.
For all of 1988, starts on homes in the Chicago area are projected
to be near the 1987 pace, but apartments will be lower. With few
completions expected, construction activity on large Chicago-area
office buildings already underway will continue at a strong pace,
but there may be a lull in new starts. The mix of nonresidential
building construction is shifting toward industrial structures,
including warehouses, though hotel construction in downtown Chicago
is also strong with several additional major hotels in the planning
stage.
Retailing
Stores in the District report mixed sales performance in recent
months. Sales at a large general merchandise retailer were excellent
in the first week of June after only a small year-over-year rise, on
a same-store basis, in May. Another general merchandiser reported
somewhat slower sales in May than a year earlier. Lackluster May
sales were attributed partly to weather. A survey of over 200
Illinois retail stores showed sales in April only fractionally
higher than a year earlier, attributed to the early Easter, and
February-April was about 2 percent above last year. Specialty stores
were weakest, both in April and the latest three months. A large
retailer reports increasing upward price pressures from suppliers,
especially on plastics. A maker of large home appliances expects
sales this year to be only slightly below the 1987 record, but is
concerned about 1989.
Agriculture
Improvement in the agricultural sector of the District is continuing
this year, helped by government programs. Farmland values have been
rising, after a protracted decline. Equipment purchases have
increased, from low level. The amount of problem farm loans has
declined considerably in the wake of improved sector earnings.
Drought conditions throughout much of the Midwest have triggered a surge in crop prices. To date, the extent of irreversible crop damage is believed to be small. But the risk of extensive crop damage has been heightened considerably if timely rains are not forthcoming through mid-August. The recovery underway in the farm sector would suffer a substantial setback in areas hard-hit by a drought.