Beige Book Report: Chicago
October 23, 1984
Summary
Developments of recent weeks suggest that economic activity in the
Seventh District has plateaued, but few observers are apprehensive
over an imminent general recession. Total employment in the five-
state area has shown very little improvement since early in the year
and job seekers are abundant. However, surveys by consultants
indicate increases in salaries of over 6 percent in 1985. Apparent
settlement of the threatened auto strike removes a shadow over many
District centers, but the terms of the agreement perpetuate the
region's competitive disadvantage of high labor costs. Except for
new cars, small trucks and vans, retail sales were disappointing in
the third quarter. Steel output appears to have started up again,
after a sharp slump, and steel executives here anticipate effective
government actions to curb imports. Mechanical capital goods demand
remains weak with new disappointments in farm and construction
equipment, and slower sales of heavy trucks. Housing activity is
slipping while most nonresidential construction has upward momentum.
Delivery leadtimes on goods have shortened. Most inventories are
under close control, but stocks of general merchandise are described
as "high." Prices are fairly stable with competition restraining
increases in most markets. Many District farmers are hard-pressed by
heavy debts, unprofitable prices, and declining values of farmland
and used equipment.
General Outlook
Despite vexing problems, quite serious in some sectors, business and
consumer confidence in the Seventh District remains generally sound—but not ebullient. It is now recognized that the national
expansion has been slowing since last spring, but only a few
isolated voices are apprehensive that a general recession is at
hand. Relatively stable prices and lack of speculative buying by
consumers and businesses have been welcome surprises. Recent easing
of interest rates has allayed fears voiced earlier of a new credit
crunch. Apparent settlement of the auto negotiations removes a storm
cloud. However, there is widespread worry over huge federal
deficits, enormous foreign trade deficits, and the shaky state of
some financial institutions and some foreign debtors. Serious
imbalances, in short, are seen to be financial rather than physical.
Employment Growth Slow
Through August 1984, the rise in payroll employment since December
1982 in the five District states was only half as great as in the
nation. District employment has remained well below the level of the
late 1970s. Since February, a large portion of the District
including the entire states of Illinois and Iowa have witnessed no
growth at all in employment. Hiring survey and projections of
activity by industry indicate no significant improvement in the
months ahead. Job seekers are abundant, although many are said to be
poorly trained and qualified. Despite slack labor markets, private
surveys indicate Chicago area employers plan average increases in
salaries in excess of 6 percent for 1985, slightly more than in
1984, and close to the national average. Employers are making
intense efforts to curtail soaring costs of medical benefits, but
have had only limited success so far. The new UAW pact retains
medical benefits intact. Chicago teachers threaten a strike if their
medical plan is made contributory. Strike threats loom in the
trucking and airline industries where employers are trying to force
substantial compensation concessions to get labor costs more in line
with those of non-union competitors.
Evaluating the Auto Settlement
Rank-and-file approval of the three-year UAW-GM pact and the
tentative Ford settlement seem to remove the threat of a major work
stoppage that had been overhanging the District economy all year.
Unlike earlier years of auto contract renewals, there are no near-
term contract expirations of importance to be faced in the farm and
construction equipment industries. Thus, the durable goods
industries of the Midwest appear to be entering an extended period
of labor peace. The new auto agreements, valued at roughly 25
percent over three years (depending on actual costs of COLA, medical
benefits, job security provisions, retirement improvements, etc.)
have been greeted by some as "modest" and noninflationary, but other
observers point out that they extend and reinforce the heavy labor
cost differential that has been a major factor in the competitive
disadvantage of the region relative to other regions and abroad. At
the end of the contract, the average annual labor cost per active
production worker in the auto industry will substantially exceed
$50,000. Pressures for investments in labor-saving equipment and
foreign sourcing can be expected to intensify.
Steel Slump Over?
Raw steel production in the Chicago and Detroit districts dropped by
more than a third from mid-May to late September before turning up
in early October. The accompanying decline in steel shipments in the
third quarter was more than seasonal, in contrast to earlier
expectations. Except for the hard-hit farm sector, steel consumption
has held at, or near, expected levels. Therefore, the decline is
attributed to increased imports and inventory liquidation. The
fourth quarter is expected to see improvement, bringing industry
shipments for the year to about 75 million tons, well above 1983,
but several million tons less than expected earlier in the year.
Higher mill shipments in the fourth quarter will reflect greater
consumption in the motor vehicle industry and nonresidential
construction, stabilization of inventories, and reduced imports.
Industry leaders have been assured that the Administration "means
business" in restricting imports from third-world countries, up till
now uninhibited by restraints. Imports are expected to return
gradually to 20 percent of domestic usage, down from the 26 percent
ratio for the first 8 months of 1984.
Capital Goods
Producers of mechanical capital goods still report general weakness.
Defense orders continue to expand, but are of relatively small
importance in the District. Orders for oilfield apparatus and
materials handling equipment have improved, but from a very low
base. Light construction equipment is improved, but heavy items,
such as outdoor cranes, remain severely depressed. Farm equipment
sales are running well below last year's sad level. Orders for heavy
trucks dropped in the third quarter, but demand for medium trucks
and truck trailers remains vigorous.
Construction
Homebuilding has declined from last spring, but remains near last
year's level. Sales of new and used homes have held up better than
expected, partly because the public has accepted the view that high
rates are here to stay. Conventional mortgage interest rates quoted
range from 13.5 to over 14 percent, plus 3 to 5 points, about 100
basis points below the peak of last spring. Almost 70 percent of new
home mortgages are ARMs, with initial rates ranging up to 12
percent. Nonresidential construction of virtually all types, with
office buildings leading, continues to increase with a steady stream
of sizable new projects announced.
Retail Sales
Some major retailers express disappointment over volume in recent
months. The two-year boom in appliances, furniture and other home
furnishings appears to have peaked out. Soft goods have strengthened
somewhat. General merchandise inventories are generally excessive.
This has led to widespread price cutting to keep inventories from
rising further.
Prices Fairly Stable
Competition, including a wide range of imported goods, is keeping
inflation in check. A retail analyst estimates general merchandise
prices average less than 1 percent above last year, the smallest
rise in many years. In the wholesale markets, prices of many metals
have declined in recent months. Increases in prices of paper
products, gypsum board, and electronic components have been
substantial, but may have leveled.