August 6, 1984
Summary
Business conditions continue to improve in the Seventh District, but
the extent of the recovery has been less satisfactory than in the
nation generally. Confidence of executives and consumers, overall,
is at the highest level in several years. The strongest improvement
has been in motor vehicles, where the outlook is clouded by
complicated labor- management negotiations now in progress. Most
producers of mechanical capital goods report gains over last year's
severely depressed conditions, but the revival is far from
satisfactory, especially in farm equipment. Export markets remain
weak. Attempts to cut labor costs against union opposition have led
to new confrontations, and threatened closings of additional
factories and stores. Some electric utilities are under severe
financial stress, mainly because of problems with nuclear plants.
Retail sales continue at good levels, especially durables. Price
inflation remains moderate. Except for some types of motor vehicles,
there are no significant supply restraints. Paper and paperboard
producers are operating near capacity. Housing activity,
increasingly, is restricted by high interest rates and availability
of credit. Nonresidential building prospects, in contrast, have
strengthened. Both residential and nonresidential construction
activity are far below levels of the late 1970s. Crop conditions
generally are favorable, but many farmers are burdened by debts
incurred in earlier years and are holding back on continents.
Farmland values have declined further.
District Versus Nation
Attitudes expressed at gatherings of financial and business
executives in the Seventh District seldom reflect the felicitous
aura of most evaluations from New York and Washington. Prosperity
has not returned to the Midwest. The best evidence is found in
employment data. The rise in payroll employment since late 1982 has
been only half as great in the five-state area as in the nation.
Manufacturing employment has increased somewhat faster here than in
the U.S. in this period (largely because of motor vehicles), but
remains 20 percent below the levels of five years ago. Non-
manufacturing employment has increased only slightly here and
remains below the levels of 1979, in contrast to substantial gains
in the U.S. Comparisons of changes in income and retail sales with
the nation reflect these trends.
Reasons for District Problems
Reasons for the weaker situation in this region relative to the
nation are varied and complex. No relief is in sight. Most important
has been the limited recovery in capital goods—including machine
tools and equipment for construction, agriculture, mining, and
railroads. Second, aside from weak domestic markets, durable goods
producers have been especially hard hit by declines in exports and
by increases in imports. Third, continued financial stress seriously
depresses agriculture and businesses that serve farmers. Fourth,
construction activity remains far below earlier peaks. Fifth, many
District financial institutions, public utilities, state and local
governments, and hospitals have been forced to curtail employment.
Finally, most areas in the region have seen slow growth or declines
in population, which both reflect and contribute to the problems
described above.
Labor Negotiations
Labor-management negotiations over adjustments in labor costs have
led to confrontations, sometimes bitter, in a variety of industries,
including food retailing, machine tools, meatpacking, and
state/local government. Some unions have voted heavily against
proposals to cut wages and tighten work rules, even with the
understanding that their facilities will close. In many cases, the
main issue is a lower starting wage with freedom to use more part-time workers. A strike is expected in coal mining in October and
utilities are increasing coal stocks. By far the most important
negotiations, directly involving 500,000 workers, began in the auto
industry on July 23. Unions want higher wages now and in subsequent
years, larger pensions, job guarantees, and a reversal of
concessions agreed to in early 1982. Managements wish to hold down
such claims and also limit health benefits. Companies are making
record profits; the UAW has a record strike fund. Managements
threaten to increase foreign sourcing of components if a
satisfactory agreement is not reached. Detroit sources describe both
sides as outwardly optimistic on a settlement, but "negotiations
will be the most complicated and difficult in their 47-year
history." The outcome will be anxiously awaited throughout industry
because the auto agreement usually has set the tone for subsequent
negotiations in farm and construction equipment, rubber, and steel.
Housing
Residential construction has held up surprisingly well so far, but a
decline appears to be imminent. In the first half of 1984, housing
permits in the five-state region were up 25 percent from 1983, and
double the 1982 level. However, permits were less than half as great
as in 1977 or 1978. Nationally, permits this year have about equaled
the strong performance of 1977-78. Current effective mortgage rates
approaching 15 percent are barring many potential buyers, especially
second-time buyers. Recent levels of housing activity have been
aided by extensive use of ARMs. But high default rates on ARMs,
double that on fixed rate loans according to a major insurer, have
caused lenders and borrowers to re-examine this device. Private
mortgage insurers headquartered in this region (which depends
heavily on private insurance) wish to raise their rates on ARMs by
40-50%.
Nonresidential Construction
High financing charges do not appear to be slowing the recovery in
nonresidential building. One analyst lists 27 large, new commercial
buildings planned for the Chicago area, mainly downtown. Substantial
office vacancies still exist, but leasing volume has increased and
large blocks of prime space (50-100,000 square feet) are relatively
scarce. Only one large, new building will open in downtown Chicago
in 1985. Manufacturing building contracts also have increased from a
very low base. Store construction has strengthened, but is
concentrated in individual buildings or small shopping centers.
Dodge nonresidential construction contracts (in square feet) in the
first half of 1984 were double the level of 1982 in the five-state
area. However, they were only half as great as in 1978. For the
nation, first half volume was within 10 percent of 1978.
Agriculture
District farmland values continue to edge downward, reflecting low
farm sector earnings of recent years and lackluster earnings
prospects for the near future. Our latest survey of agricultural
bankers indicates that District farmland values declined 1 percent
in the second quarter and 7.5 percent in the year ending July 1.
District farmland values are down about 20 percent from the 1981
peak and are near the levels of late l978. Declines in the Midwest
have been greater than in most other regions.
Electric Power
The decision, announced July 16, to halt construction of a long-delayed nuclear power plant in Michigan has far-reaching
consequences. Over 6,000 construction workers and technicians
apparently will be dismissed. If the utility cannot raise rates
sufficiently to offset an apparent $4 billion write-off, it may be
forced into bankruptcy. This could threaten both its ability to
supply adequate electric power and to purchase natural gas reserves
needed for the winter. Ironically, its sales of power are up
strongly this year to residential, commercial, and, especially,
industrial customers for the first time in five years.