January 20, 1984
Summary
In early 1984 business activity in the Seventh District is on the
uptrend over a broadening spectrum of sectors. Evidence available in
the District does not indicate the "slowing" suggested by some
national data. The general view here is that the improvement will
continue through 1984, but with a possible dampening effect from
higher interest rates in the second half of the year. Employment in
manufacturing is rising, but gains in nonmanufacturing are modest at
best. Reports on retail sales were strong for December. Inventories
are generally low. Demand for some types of mechanical capital
goods, e.g. construction equipment, is strengthening. Wholesale
prices are firming, but many remain below 1979 levels. Residential
construction is expected to increase again in 1984, but remain far
below peak years of the 1970s. Severe cold adversely affected some
sectors in late December, but stimulated outlays on batteries and
plumbers' bills. Rising demand is causing shortages of some
materials such as gypsum board and has boosted backlogs for heavy
trucks and trailers and large autos.
Shortages and Leadtimes
Reports indicating pressure on capacity are becoming more frequent.
For December, 39 percent of the purchasing managers in Chicago and
48 percent in Milwaukee reported longer delivery leadtimes, while
only a few reported shorter leads. In late 1982, delivery times were
shortening. The stretchout has been particularly marked for truck
trailers and custom-built heavy trucks. Large cars also are back
ordered. Gypsum board producers say that shortages in the South are
attracting high-cost shipments from Canada. The piggy-back rail car
fleet is fully utilized. There are also some reports or tight
supplies of steel sheets, computer chips, refrigerators, and car
batteries. Problems of supply partly reflect cutbacks in domestic
capacity. Most industries still have ample capacity, and steps are
being taken to eliminate bottlenecks.
Prices
Some 45 percent of District purchasing managers reported paying
higher prices in December, while only a few paid lower prices. A
year earlier companies paying lower prices still outnumbered those
paying higher prices. Prices have not risen sharply except for a few
cases such as aluminum and airline fares. More moderate increases
are also reported for castings. forgings, paper and paperboard,
gypsum board, and some types of steel. In most industries where
prices have increased, analysts insist that substantial further
increases must occur if profit margins are to return to a prosperous
level. Further increases in utilization rates are necessary,
however, before the competitive situation will permit such increases
in these industries.
Consumer Purchases
General merchandise retailers were very pleased with sales in
the Christmas season. Sales of recreational equipment, appliances,
computers, telephones, and auto accessories were especially strong.
Auto sales were held back by availability of large domestic cars and
Japanese cars. Credit use has been heavy, and delinquencies have
been low—probably as a result of careful screening in response to
more lenient bankruptcy laws. Airline traffic in December only about
equalled year-ago, partly because of weather, but also because most
bargain fares have been withdrawn.
Employment
Improved job markets in the District are still largely a
result of callbacks in manufacturing. Rehires by motor vehicle and
parts plants are by far the most important, but there have also been
gains in appliances, mobile homes, and recreational vehicles.
Residential construction is also up. In November, all District
states, with Michigan far in the lead, reported good gains in
factory employment from late 1982. but the shortfall from late 1978
still ranged from 15 percent in Wisconsin to 20 percent in Iowa, and
24 percent in Illinois, Indiana, and Michigan. Total non-
manufacturing employment data show no improvement through November.
State and local governments, public utilities, and financial
institutions are generally hiring only to fill essential vacancies,
and many are reducing staff.
Steel
Raw steel facilities are expected to operate at 65 percent of
capacity in the first quarter versus 60 percent in the fourth
quarter. Rates will be higher at the most modern Chicago-area mills.
Demand for all types of steel is stronger, but the concentration is
in cold-rolled steel, mainly for auto and truck bodies, and hot-
rolled sheet for frames for trucks and large cars. Tubular "oil
country" products are picking up from a low level. (Quality of some
pipe on hand had deteriorated.) Demand for plates, for producer
goods, and heavy structurals, also has improved, but very slightly.
Steel mill operations were handicapped by a variety of problems
during the severe cold of late December.
Capital Goods
Mechanical-type capital goods (non-electronic) are showing signs of
life. Orders for large and double trailers, authorized last year,
are three times current capacity, and quoted delivery times are for
September. Producers of heavy-duty trucks to haul trailers are
quoting April deliveries. Capacity to produce heavy trucks has been
reduced and may be under strain if demand continues to rise. But the
capital goods picture in the District is still far from
satisfactory. Relatively few laid-off workers have been called back.
Orders for freight cars increased in December, but from a very low
level. In farm equipment, the anticipated spurt in sales before the
turn of the year to gain tax advantages did not materialize.
Parts Versus Finished Goods
The capital equipment improvement is still characterized as a
repair, replacement and modernization market, rather than an
expansion market. Modest increases in demand for forgings, castings,
components, steel bars, drill bits, and fasteners are in line with
this assessment.
Electric Power
Electricity usage has increased in the past month or two reflecting
both higher industrial demand and cold weather. This rise was
welcomed by District utilities, some of which are under
unprecedented financial strain. The power industry, once a rock of
stability, faces perilous times because of an adverse regulatory
atmosphere (both on rates and environmental considerations), and
questions concerning costly facilities under construction that are
not needed to accommodate prospective demand.
Housing
Sales of new and used houses, which slipped from the rates reached
last spring, have held up better than many observers had thought
possible. Assuming no significant rise in interest rates, builders
expect a further increase in starts in 1984. However, the District
total would still be about 50 percent short of the best years in the
1970s. An important reason for optimism in the Chicago area is the
sharp rise in use of variable rate mortgages from about 25 percent
last spring to 50 percent in October—even higher in new homes.
First year mortgages rates of 10 percent or less are available,
usually with 3 or 4 percent fees. A wide array of terms are offered,
so "shopping around" on the part of home buyers is advisable.