Beige Book Report: Chicago
June 23, 1982
Summary
Developments in the Seventh District provide little hope
for near-term improvement. It is unlikely that the region will
participate in the uptrend widely expected for the nation in the
second half of 1982. Machinery and equipment output and bookings
have been declining sharply this year in virtually all lines. Sales
and output of motor vehicles improved in the second quarter, but
remained at depressed levels. Increases in defense outlays have not
been a significant factor here. Retail sales of nondurables rose
somewhat in May, but remained relatively soft. Construction activity
showed less than seasonal gains. Most employers have been reducing
or, at best, maintaining staff. Unilateral cuts in nonunion
compensation are common. Renegotiations of labor contracts continue,
not always successfully. Some large corporations are shrinking or
restructuring operations. Price reductions are still common, but may
be moderating. Oil product prices have rebounded. Seventh District
farmers are completing crop plantings, after a slow start in Iowa.
Livestock prices continue at favorable levels, but corn and soybean
prices remain depressed. Farm equipment sales remain poor.
Declines Spread
Few economic sectors in the District have remained
untouched by the recession. Meat packing has been going through a
painful adjustment. Electrical component manufacturers report
substantial declines in orders, for some the worst in their history.
Demand for office furniture, which remained strong through the first
quarter, softened in the spring. Service industries also report
reduced demand, including engineering, technical consulting, public
relations, commodities trading, and recreation.
Inflation
Some companies now expect a 5 percent rise in average
prices of purchased materials in 1982, only half as much as in 1980
or 1981. But in some sectors prices are down dramatically. Bids on
construction projects are running 10 to 20 percent below estimates.
Sharp price discounts also are noted for steel products, nonferrous
metals, cement and other building materials, and paper products.
Many of these depressed prices would rebound rapidly if demand
improved, partly because capacity has been reduced by retirement of
older facilities.
Corporate Restructuring
Financial problems and reduced estimates of
future demand have caused various District corporations to take
steps to restructure their operations. Drastic actions are required
in some cases to "ensure survival", and to get into position for the
eventual upturn. Divisions are being closed or sold—some because
they are unprofitable, others because they are readily marketable.
Substantial reductions in corporate staff and unilateral cuts in
nonunion salaries—up to 10 percent—are common. Negotiations with
unions to adjust compensation and work rules in order to control
labor costs continue, often without publicity. However, substantial
increases in compensation continue to be announced in many fields.
Employment
Labor markets continue soft in all portions of the
District. In April, payroll employment in the five District states
was down 5 percent from the prosperous level of April 1978 and
manufacturing down 18 percent, a much worse performance than the
nation. Unemployment averaged 12 percent in the District in April,
compared to 5.6 percent four years earlier (when it was lower than
for the nation). In addition to those unemployed, many workers are
on short hours. Complete shutdowns for a week or more at a time are
common. New hirings are at a low ebb as indicated by help-wanted ads
and reports from job-finding agencies. Summer work for students is
less available than at any time since the 1930s. New college
graduates with technical degrees are having unusual difficulty
finding work.
Capital Expenditures
Evidence from District companies suggests a
much larger decline in capital spending than was indicated by the
recent Commerce Department survey, both for projects to be located
here, and for equipment produced here. Business equipment orders are
off sharply this year, frequently by 20 to 30 percent or more.
Components such as castings are off as much as 50 percent.
Motor Vehicles
Auto production was off 31 percent from last year in
the first quarter, and 22 percent in the second quarter, but the
third quarter is expected to be up 7 percent. Light truck output has
been running well ahead of last year since February, but heavy
trucks remain weak. Vehicle inventories are at comfortable levels
and imports are under restraint. Industry leaders expect a
continuing moderate improvement in sales and output of both cars and
trucks, but not enough to return the auto centers to prosperity.
Steel
Although steel demand is running well below forecasts made
earlier this year, District producers have increased their share of
the total. Primarily, this is because auto industry demand for
steel, an important market for these mills, is "less bad" than the
total. Demand for heavy steel products for structures and equipment
is "weak and getting weaker." Steel executives are pleased that the
Administration has decided to take action to curtail steel imports,
although imports are less of a factor here than nationally.
Retail Sales
Sales of general merchandise improved in May according
to major District retail chains, but no strong further advance is
anticipated. Auto parts and apparel are moving well, but big ticket
items, including household appliances and floor coverings, remain
slow. While use of installment credit has increased somewhat,
delinquency experience has been favorable, reflecting tighter
standards.
Construction
Construction contracts for new commercial and
industrial structures in the Midwest are running well below last
year's depressed level. Work continues on large new office buildings
for Chicago's downtown area, but new starts are being delayed
because major tenants have not been signed and permanent financing
has not been arranged. Rehabilitation work is relatively strong.
Agriculture
Crop planting is nearly complete throughout the
District. Even west of the Mississippi, where rains caused delays,
substantial progress has been made. As of June 20, soybean planting
in Iowa was 88 percent complete (compared to a five-year average of
100 percent), and corn planting was 98 percent complete. Despite
heavy rains in some local areas, crop conditions are quite good.