Beige Book Report: Chicago
August 6, 1985
Summary
Business conditions in the Seventh District continue sluggish, with
no sign of significant improvement in the months ahead. Forecasts
have been revised down. While analysts and executives are cautious
and uneasy, few anticipate a general decline. Total payroll
employment has increased modestly in the five-state area in recent
months, but manufacturing employment has declined. Indiana and
Michigan, aided by the recovery in motor vehicle output, have paced
the District, while Iowa and Illinois, more associated with the
depressed agricultural sector, have enjoyed very little improvement.
Demand for most capital goods produced in the District has shown
only partial recovery, and in some cases none at all. Heavy trucks
and trailers, which were strong early this year, have weakened in
recent months. Steel output has declined since last spring, contrary
to earlier expectations. Construction activity has been helped by
lower interest rates. Retail sales of general merchandise have been
below forecast, and credit delinquencies have increased. However,
retail inventories, generally, have been brought into line. There
are no problems in procurement, and order leadtimes have shortened
on many items. Prices in wholesale markets have been soft,
especially steel, nonferrous metals, and paperboard.
Layoffs
A number of large District firms are in the midst of painful staff
reduction programs to reduce financial deficits. Deep cuts sometimes
involve veterans with 30 or more years service. Included are
railroads, airlines, steel, capital goods, electronics, utilities,
financial institutions, and conglomerates. Staff reductions take the
form of attrition, retirement incentives, and outright discharge.
Mergers and acquisitions, a large factor among firms headquartered
in the District, typically result in elimination of employees deemed
redundant.
Motor Vehicles
Total auto deliveries have remained at a high level, but slipped in
June and early July, at least partly because of the expiration or
reduction of incentive programs for domestics. Imports have
increased as Japanese cars have become more available. Some popular
domestic models are in short supply, a situation that should be
eased by strong third quarter production schedules. The largest auto
manufacturers were pleased by the plan to amend the CAFE requirement
penalizing production of full-size cars. Sales of light trucks have
remained vigorous. However, orders for heavy trucks fell well below
production in the first half, and backlogs are lowest in 2 years.
Second half output is expected to be 25 percent lower than in the
first half.
Steel
With orders disappointing, raw steel output has declined, and
overall operations have remained below break-even levels. Producers
continue strenuous cost-cutting efforts. Industry analysts view the
effectiveness of the Administration's import restraint program as
doubtful. Auto industry needs are the main support of steel order
books. Light construction steel also is in good demand. Steel for
heavy construction and capital goods remains soft.
Capital Goods
Demand is down from last year for various lines of equipment,
including oil and gas development, food processing, and materials
handling. Construction equipment remains very depressed. Farm
equipment sales have been below last year's miserable level. Rail
equipment orders are still in driblets. Two computer and
semiconductor manufacturers headquartered in the Seventh District
are reducing staff in response to the weakening in that industry,
but most production is outside the District.
Construction—Nonresidential
Nonresidential building in the District showed a small advance in
the first half of 1985, after two years of vigorous growth.
Nevertheless, activity remains well short of good levels of the late
1970s. Michigan, which was most depressed, has had the sharpest gain
over the past 3 years. Commercial construction has been strongest in
the District--new office and retail buildings and substantial
rehabilitation work. Additional large office buildings are planned
to be started in downtown Chicago and strategic suburban centers,
despite a "substantially overbuilt" market. Proposed tax changes
would reduce incentives for developers. Concessions on leases are
large and widespread. New space is constantly coming on the market
as new buildings are completed.
Construction—Residential
Residential building in District states, except Michigan, has been
somewhat below a year ago. Construction has improved in all states
from 1984's second half. Activity, overall, is only about half the
level of 7-8 years ago. New work is severely depressed in
communities dependent on agriculture or hard hit manufacturing
firms. Mortgage interest rates, recently at the lowest levels since
the late 1970s, continue to support sales of new and used homes.
Highway Work
Highway construction is a source of strength in the District. Most
of the new federal highway money is being used for small, urgent
projects, usually involving asphalt resurfacing. Government
authorities are said to be reluctant to start big projects because
the flow of federal funds could halt again this fall.
Consumer Spending
Major general merchandise retailers found sales to be disappointing
in May, June, and early July. Moreover, credit delinquencies have
been rising. However, inventories have been reduced from somewhat
excessive levels several months ago, through tight restraints on
ordering. An industry analyst notes the possibility of shortages in
the pre-Christmas buying season. Home appliance shipments were at
record levels in the second quarter. (Appliance manufacturing is
important in the District.) Most lines were strong, but the leader
has been microwave ovens, the majority of which are imported.
Agricultural Distress
District farmers continue under pressure from weaker crop prices and
declining farmland values. Our survey of District agricultural banks
shows that farmland values at mid-year were down nearly 5 percent
from March, down 20 percent from a year ago, and down 40 percent
from the peak in 1981. Most bankers expect further declines.
Prospective crop yields in Iowa and some other areas of the District
have been reduced somewhat because of dry weather in recent weeks.
Overall harvest prospects, however, remain favorable. Corn and
soybean prices, already down about 20 percent from year-earlier
levels, are drifting lower, reflecting expectations that this year's
harvest will substantially exceed requirements. Farm loan portfolios
continue to deteriorate. In our mid-year survey, agricultural
bankers reported "major or severe" repayment problems with about 17
percent of their farm loans, up from 12 percent a year ago.