November 2, 1983
Summary—A Better Look
The economic picture in the Seventh District brightened
significantly in the past six weeks. Morale has improved and more
consumers and businesses are activating deferred spending plans. The
recent monthly meeting at the Federal Reserve Bank of a group of
economists representing leading District companies was the most
positive in at least two-and one-half years. Most of those present
reported gains in demand and there were few new weaknesses. Also in
October, purchasing managers' associations in Chicago and Milwaukee
reported accelerating orders, output, and employment for September.
Leadtimes on new orders have stretched out further, backlogs are
rising, and more price increases are occurring. Retail sales are
strong, but less so in the District than in the U.S. Inventories, in
all but a few lines, remain lean, but are increasing in line with
activity. Steel orders are rising, but still concentrated in the
lighter grades. Residential construction plans have been dampened by
high interest rates, probably more here than in the nation, but
commercial construction has shown new strength.
But Far Short of Prosperity
The recent improvement in District activity should be kept in
perspective. This region is still generally depressed. Its
performance gap relative to the nation probably has widened during
the recovery. Despite increased hirings, jobs are still hard to
find. Where increases in demand for manufactured goods have been
substantial, activity usually remains far below the peaks of the
late 1970s. Agri-business remains very depressed despite prospective
gains in farm income. The high value of the dollar continues as a
powerful restraint on exports while encouraging imports. With the
exception of a boom in truck trailers, orders for capital goods
produced in the District have not improved much from the depression
levels reached earlier in late 1982 or earlier this year.
Improvement in Chicago and Milwaukee
Monthly reports of purchasing managers in Chicago and Milwaukee have
shown a gradual strengthening trend this year. In most respects,
reports on September developments were the most vigorous of the
year. Chicago managers found the area's economy "forging ahead,"
with "surging production" and "strong backlogs." The Milwaukee
report showed "substantial improvement" with the highest proportion
of respondents reporting higher production and new orders than at
any time since the monthly survey was started in 1969. This recent
improvement was from a very low base. Activity is still far short of
prosperous levels. Perhaps the most significant aspect of these
reports is the evidence that badly eroded confidence is rebuilding.
Jobs and Income
Employment has increased gradually in the District since last
December, but probably not as fast as in the nation. Total payroll
employment in the five-state area is still about 9 percent below the
level of 1978-79. Manufacturing is off about 22 percent. Hiring
intentions surveys and help-wanted ad volume indicate further gains
for the months ahead. Unemployment rates are down, but welfare rolls
are at record levels. Many long-term unemployed who have lost
medical insurance are relying on public health programs. Nonunion
employers are planning wage and salary increases in the 5 1/2 to 6
1/2 percent range for 1984, less than in past years, but
surprisingly large in view of the weak job market. A number of long
strikes are in progress in manufacturing, with unions resisting
concessions on wages, benefits, and work rules. Chicago teachers
settled a record 15-day strike on October 24, gaining a 5 percent
salary boost, for which funds are not yet available. Their average
salary is about $26,000 with liberal benefits. They eventually will
be paid for all but one of the strike days.
Autos
Demand for cars strengthened dramatically in the summer and
continues unabated in October. Dealers speak of "desperate"
shortages of popular cars. Stock-outs of large, rear-drive, 8-
cylinder cars have caused dealers to quote three-month delivery
times--a situation unknown for many years. A similar problem exists
for some Japanese models. Producers did not foresee this surge in
demand for large cars. They are striving to boost production,
hampered by some "quality problems."
Capital Goods
Truck trailer producers are expected to operate at capacity well
into 1984. Mostly, this reflects the new size limits, but analysts
believe that underlying demand also is improving. Companies report
scattered increases in demand for communications equipment, heavy
trucks, materials handling equipment, and a variety of components.
Sales of equipment for mining, rail transport, marine transport,
construction, agriculture, and metalworking have remained poor. With
some exceptions export demand is "terrible." Much good used
equipment is available at bargain prices. Capital expenditures of
most firms are concentrated on outlays for replacement and
modernization, including computers and other electronic equipment,
rather than major new facilities.
Steel
Orders for steel have improved, but demand is still concentrated in
lighter products with plates and structurals very slow. Order
leadtimes for cold-rolled sheet and coated sheet are out three
months, as far as bookings are taken. Some idle finishing capacity
is being activated. Demand for steel for frames for trucks and large
cars is strong. Shipments to service centers are up "sharply."
Demand for oil pipe and railroad rails increased recently from very
low levels. There is no evidence of inventory building by customers.
Retail Sales
Cold weather brought immediate gains in sales of fall and winter
apparel. Consumers are in a confident mood and are using credit
freely. According to big chains, sales are up less in the Midwest
than in the rest of the nation. Inventories are tight and some sales
may be lost if the Christmas season is strong, as is generally
expected. Gains over last year's poor performance are likely to be
substantial. Wholesale prices of general merchandise are expected to
increase somewhat faster in 1984.
Housing
Residential construction in the District continues well above last
year's extremely depressed level, but has probably declined since
midyear after allowance for seasonal trends Rates on fixed-rate,
long-term mortgages are now in the neighborhood of 13.5 percent.
Variable rate mortgages are offered at about 150 basis points less,
but are shunned by most home buyers. A wide variety of plans are
offered. A general easing of terms probably is necessary to keep
residential construction from declining further.