Beige Book Report: Chicago
May 8, 1984
Summary
The business improvement in the Seventh District continues, but the
uptrend in retail sales slowed in the early spring and housing
activity ebbed, allowing for seasonal trends. Employment has
increased further, but gains are still concentrated in
manufacturing. Despite sharply higher profits, cost reduction
programs are still being pressed vigorously. Output of motor
vehicles, paper products, gypsum board, and household appliances is
high, often at or near full capacity. Nonresidential construction is
showing new life, both private and public. Demand for most
mechanical capital equipment has improved, but only moderately. Two
major public utilities have serious financial problems, with no
resolution in sight. Although leadtimes on deliveries of goods have
stretched out further and price increases are more frequent, most
items continue to be readily available. Inventory building is
underway on a broad front, but appears to be voluntary and in line
with plans. Despite evidence of slower growth, most District
executives anticipate further gains in a highly competitive
environment. Pressures to restrict imports are building, supported
by business and labor groups. Farmland values declined again in the
first quarter.
Cost-Cutting
Various companies whose sales and profits have increased sharply
since the low point of the recession continue to press cost-cutting
programs—eliminating marginal and replacing better-paid employees,
consolidating functions, selling or closing less profitable
operations, etc. In past expansions such efforts often were relaxed.
New hirings require special approval, and early retirements are
encouraged. Staff reductions through attrition are difficult
because, reflecting slack labor demand, quit rates are a small
fraction of the postwar average, and the lowest since the 1930s.
Also cutting staff are banks, insurance companies, and other
financial service companies facing intense competition. The medical
field--hospitals, laboratories, and medical supply firms—has been
Business Climate
Interested groups are much concerned about publicity given to recent
studies indicating that Midwest states are "inhospitable" to
business. Problems cited include high wages and benefits,
restrictive work rules, energy costs, taxes, unemployment insurance
and workers' compensation, government regulation, and lack of
special incentives to locate, expand, or remain in the region. Some
charge that evaluation methods of the surveys are unfair and
inaccurate, but there is general recognition that unfavorable
"scores" have foundation in fact.
Job Markets
Increases in manufacturing employment in the District since the low
point in late 1982 compare favorably with increases in the nation,
mainly because of callbacks in the motor industry. Nonmanufacturing
employment, however, has increased less than in the nation. For both
manufacturing and non- manufacturing the District experience
compares unfavorably with the nation relative to the 1981 peak or to
earlier years. Nevertheless, many factories are working long hours—seven-day weeks, heavy daily overtime, and extra shifts. Major food
chains in the District have cut compensation of union workers
substantially despite existing contracts. Executives say these moves
were necessitated by growing competition from food discounters. Cuts
in labor costs have been reflected in lower food prices.
Retail Sales
Merchants were somewhat disappointed by April sales, at least of
soft goods. However, it is not believed that the underlying strength
of the upturn has deteriorated. Sales of appliances, led by
microwaves, have been "phenomenal". Other hard goods also have done
well. Inventories, overall, are now slightly higher than had been
budgeted, especially when goods on order are included, but not a
cause of concern. General merchandise prices, up 2 percent in 1983,
are expected to rise 3 percent this year.
Capital Equipment
Orders for capital equipment are rising, but with wide variations by
category. Farm equipment remains very weak. Light construction
equipment has improved, but not heavy types. Freight car orders are
somewhat higher, but only specialized types, including piggy-back
flatcars, auto carriers, and some bulk carriers. Machine tool orders
have exceeded shipments this year, but the industry remains in "dire
straits" because of sharply reduced cash flow. The paper industry is
starting a new wave of expansion. There is no activity in new
chemical plants, oil refineries, electric utilities, ore processing,
cement, and gypsum board. A leading steel producer may build a
large, modern cold-rolled sheet mill. Output of heavy trucks and
trailers is at full capacity, and this is expected to continue into
the second half. Traffic handled has increased sharply, and the
trucking fleet aged and deteriorated in the past several years of
low investment.
Housing
For the first quarter, housing permits were one-third above 1983,
and four times the pitiful level of 1982, but less than half that of
early 1977 or 1978. Sales of new and used homes slowed in the pest
month, except in particularly "hot" markets. The housing slowdown is
attributed to a reduction in the overhang of deferred purchases, and
concern over the soundness of ARMs that involve artificially low
starting rates.
Nonresidential Construction
The uptrend in office building construction has gathered strength,
but mainly in the Chicago area. Additional large buildings are
getting underway. (Factory work is up, from almost zero, but still
very low.) Leasing activity is up substantially and rents have
firmed, belying "expert" forecasts early last year that the overhang
of space would take several years to absorb. Highway construction
projects are moving forward at a very rapid pace, after lagging
earlier in the year.
Steel
Shipments of steel are expected to continue to rise through the year
with a less than seasonal decline in the summer. Demand is strong
for lighter steels to be used in vehicles, appliances, and housing,
with output at virtual capacity. Inventories are building, on a
voluntary basis, but remain low by past standards. Structurals are
improving, but demand for heavy plates used in capital goods.
remains weak.
Agriculture
Our survey of agricultural bankers indicates that farmland values in
the District declined nearly 3 percent in the first quarter, ranging
from virtually no change in Indiana and Michigan to an unusually
large decline of 6 percent in Iowa. Overall, farmland values were 5
percent below the year-ago level and 18 percent below the 1981 peak.
Weakness in farmland values partly reflects asset adjustments by a
small number of farmers. The major cause of forced sales has been
debt-financed investments in the boom of the late 1970s, at high
prices and high interest rates.