November 30, 1988
Summary
Business activity in the Seventh District continues to expand,
though several indicators suggest at a less rapid rate than earlier.
Chicago purchasing managers report somewhat slower, but still brisk,
expansion in October. Indianapolis purchasers indicate stronger
growth. Motor vehicle makers are working overtime at several plants
to meet demand, but cutting back elsewhere because of slow sales of
some models. Markets for heavy equipment and steel remain relatively
strong. Further growth is expected next year in capital goods.
Construction activity is holding up well, but some slippage is
expected in 1989. This year's harvest of major crops is virtually
complete in most of the District, and drought losses appear slightly
less severe than expected earlier.
Labor Markets
Increases in payroll employment in the District states during the
third quarter were slower than in the first half. Unemployment in
the District, higher than the nation throughout the 1980s, has
fallen nearly to the national rate. Labor markets have tightened in
various regions in the District. Iowa, which experienced sizable
outmigration earlier in the decade, now reportedly faces shortages
of skilled blue collar and clerical workers.
Purchasing Managers
A survey of Chicago-area purchasing managers showed continued fairly
strong expansion in business activity through October. However,
several measures were less robust than in earlier months. Production
and backlogs continued to rise but less sharply. Lengthening delays
in obtaining deliveries were also less common. Those paying higher
prices continued to outnumber, by a wide margin, those paying less
(59 percent to 2 percent) but price increases were more widespread n
prior months since July 1987. In contrast, an October survey of
Indianapolis purchasing managers, conducted quarterly, suggests
stronger expansion in the latest period.
Motor Vehicles
Car and truck sales continue at high levels. However, the somewhat
slower pace of car sales in October than in earlier months and
ambitious production plans have raised concerns that excessive
inventories may accumulate. Manufacturers' sales incentives, now
offered continuously, may be enhanced if this occurs. A Michigan
plant assembling a slower-selling car model will reduce output and
lay off 1,000 employees in January. However, other plants,
particularly truck plants, are running flat out and resorting to
overtime to meet demand.
Machinery and Equipment
Markets for machinery continue strong, overall, though demand is
softening for some types of equipment. Further increases in spending
for capital equipment, particularly heavy capital goods, are
considered likely in 1989, with growth expected to be less rapid
than this year. Investment is particularly strong in chemical
process industries, including petrochemicals and paper, mainly in
"debottlenecking" or "incremental" additions to existing capacity.
Sizable investments are also reported in steel mills; in printing
plants producing newspapers and wrapping paper; and in food
processing plants, including bakeries and breweries. Some softening
is reported in communications equipment and electronic components.
Steel
Demand for steel remains strong. Industry shipments in 1988 are
likely to outpace last year by 9 percent. Early indications for 1989
suggest a continued high level of steel purchases by motor vehicle,
appliance, and machinery makers. Shipments from steel service
centers have set records. Upward pressures on steel prices have
eased, after sharp increases earlier, but could resume next spring
when the industry may again be unable to meet peak seasonal demands.
Construction
Construction activity in the region appears to be holding up
relatively well, stronger than expected earlier, but is likely to
decline from recent levels. Contracts for nonresidential building in
the five District states, for 9 months, were 1 percent below a year
earlier (measured in square feet of floor space). Residential
contracts were 9 percent below last year, indicating that future
building activity is likely to fall. However, shipments of some
building materials, an indicator of current construction activity,
have risen this year. Shipments of gypsum board to the District
states were 3 percent higher during the first 9 months than a year
earlier. Year-to-date cement shipments to the East North Central
states were also 3 percent higher. Building activity is vigorous in
the Chicago area, particularly Loop office construction, industrial
building, and homes.
Agriculture
Corn and soybean harvests are nearly finished in most District
states. The Michigan harvest, slowed by recent rains, is about
three-fourths complete. Although badly hurt by the drought, yields
are slightly higher than earlier estimates. Corn production in
District states is expected by the USDA to be 41 percent below last
year's crop, and soybean production is estimated 29 percent lower—both sharper declines than nationwide.