Beige Book Report: Chicago
September 16, 1985
Summary
Recent reports on Seventh District economic activity suggest neither
an overall pickup nor a pronounced weakening—except for the growing
woes of cornbelt agriculture. Total employment in District states
has been about flat since spring, and manufacturing has weakened
since January. Mergers and "restructurings" of large enterprises
have been accompanied by layoffs and close reins on new hires. Auto
production, commercial and residential construction, and highway
building arc strong compared to the levels of the early l980s. Many
lines of capital goods important in the District remain weak. Steel
production continues at depressed and unprofitable levels. However,
the reported drop in steel imports in July raises hopes for higher
output in the remainder of the year. General merchandise sales at
major District retailers continue lackluster. Large prospective corn
and soybean crops and weak export demand translate into downward
price pressures and severe financial stress, particularly in Iowa
and Illinois.
Teachers' Strikes
Tentative settlement was reached in a two-day strike by 28,000
teachers and about 12,000 other school employees in the huge Chicago
district. Agreement to end the strike, the third in as many years,
came after intervention by the governor of Illinois. The 2-year pact
calls for a 6 percent first-year pay raise, with a further 3 percent
pay increase in the second year contingent on additional state aid.
Teachers also will get normal longevity increases. Teachers' strikes
continue in some other public schools districts.
Motor Vehicles
Planned production of domestic cars and trucks remains vigorous
through year-end. Cut-rate financing programs, along with improved
availability following the carhauler's strike are stimulating strong
sales gains. Inventory imbalances resulting from the strike are
being eased quickly, though stocks of popular ear models,
particularly imports, are tight. Many haulers have worked extended
hours to clear bloated inventories of cars and trucks awaiting
transport at plants, ports, and railheads. Auto output was not
curtailed by the strike. Domestic auto makers have relied
increasingly on railroads to haul vehicles in recent years. In 1984,
57 percent of domestic autos were moved from factories by rail, up
from about 50 percent in 1979. In contrast, importers rely on trucks
for transport of 90 percent of cars from ports of entry. Because
stocks of popular imported models had been tighter than stocks of
domestics, the carhaulers walkout had a greater impact on sales of
imports. Sales of small trucks, many bought for consumer use, have
been setting records. Demand for medium and heavy trucks has
softened since early this year. The mix has been shifting from
heavies toward mediums. Production of truck trailers has slumped
sharply following the surge in demand last year which had reflected
regulatory changes.
Steel
Demand for steel has been strong for construction and autos.
Nonelectrical machinery, agriculture, and various other markets are
weak. Steel shipments of domestic producers are expected to rise in
the second half, seasonally adjusted, partly because of lower
imports. The normal summer slowdown in steel production has been
less pronounced than usual at major District centers. Sharply lower
steel imports in July, to 22 percent of the U.S. market from 26
percent in the first half of the year, apparently reflect partial
success for the Administration's import restraint program. However,
import data arc erratic, and delays in reporting have lengthened in
the past year. Court approval was finally given for demolition of
over half of U.S. Steel's huge South Works in South Chicago where
employment is down to around 900 from as many as 10,000.
Capital Goods
Demand for many types of capital goods produced in the Seventh
District remains very weak. Included are equipment for heavy
construction, mining, the oil and gas industries, public utilities,
and railroads. Machine tool orders arc weak except from defense
contractors and the auto industry. Sales of large farm tractors and
combines are off sharply from already low levels. Major farm
equipment plants are expected to be closed for extended periods this
fall. Foreign competition continues intense in most capital goods
lines.
Construction
Building activity in the District continues well above recession
levels, but generally far short of peaks reached in the late 1970's.
Office, retail, and apartment construction are vigorous in downtown
Chicago and certain suburban areas. Some new building and renovation
work apparently is being pushed in anticipation of possible
unfavorable changes in tax laws. However, bidding volume suggests
that strength will carry into 1986. Residential and nonresidential
building is up strongly in southern Michigan, helped by the
resurgence in the auto industry in the past three years. Highway
construction is also strong in the District.
Consumer Spending
General merchandise sales of major District retailers on a "same
store" basis, have been disappointing for several months. Following
last year's inventory buildup, buying has been closely restricted,
and stocks are under better control. Sales of durables are expected
to strengthen in the second half because of the high level of
residential sales. A large retailer headquartered in the Seventh
District is eliminating its century-old catalog business, which
employs 5,000.
Agriculture
Estimates of the fall harvest, likely to be revised upward, point to
an 8 percent increase in the District's corn crop, and 11 percent
increase for soybeans. Nationwide, the increase currently are
forecast at 8 percent for corn and 5 percent for soybeans. Large
prospective harvests and slumping exports have sharply depressed
crop prices. In August, corn and soybean prices were down 10 percent
from May, about 25 percent below last year, and the lowest since
1982. Livestock prices also are very depressed, with overall meat
animal prices down 11 percent from a year ago and, except for a two-
month period in 1983, the lowest since 1978. Low commodity prices
and continuing declines in farm real estate values are further
eroding precarious financial positions of many farmers and putting
pressure on their lenders. Conditions are not expected to improve
for a long time to come.