Beige Book Report: Chicago
December 5, 1985
Summary
Recent developments suggest a relatively stable near-term outlook
for business activity in the District—no new vigor and no
significant setbacks. Growth of total employment in the District
continues to trail the U.S. Auto and light truck output are expected
to remain strong into 1986. Steel production and orders continue at
disappointing levels, with strength mainly in motor vehicles,
appliances, and construction, and at service centers. Demand for
most types of capital goods remains weak—not getting worse, but not
improving either. Residential, commercial, and highway construction
are strong, but generally far short of past peaks. Sales of suburban
industrial buildings have picked up. Inventories are judged to be
fairly lean. General merchandise sales recently have been sluggish.
Modest recoveries in grain and livestock prices in recent weeks have
been encouraging, but far from sufficient to alter the distressed
conditions facing the District agricultural sector.
St. Lawrence Seaway
Round-the-clock repair work on the 53-year old Welland Canal allowed
vessels to resume passage of this section of the St. Lawrence Seaway
on November 7. A line of waiting vessels had grown since October 14
when a 150-foot concrete section of a lock wall collapsed. The 24-day cutoff caused consternation among ship operators, shippers,
sailors, and terminal employees directly affected, but no
significant wider impact on output and employment in the District.
Attractiveness of the Seaway for shippers is limited by the winter
closing, bottlenecks at locks in peak periods, availability of
improved and often cheaper and faster alternative means of
transport, limits on size of vessels which increase costs, and
vulnerability to delays caused by accidents or breakdowns. The
Seaway has never played the major role envisaged for it when it
opened in 1959.
Motor Vehicles
Auto sales fell sharply as expected in October, after being boosted
to record levels in September by auto makers' buyer incentive
programs. Inventories, very low at the end of September, have been
increased to more normal levels. Domestic auto makers plan high
production levels into next year. Truck sales continue to set
records, but the strength is in light-duty models, especially
imports. Sales of heavy-duty trucks have declined, and growth of
demand for medium trucks has slowed.
Steel
Total demand for steel continues slow. Buying by heavy capital goods
producers remains soft. Strength is concentrated in motor vehicles,
appliances, and construction. Shipments to steel service centers
also continue strong, as steel users try to hold lower inventories.
Major steel producers, whose steel operations have been at
unprofitable levels, are attempting to push through price increases.
Capital Goods
Orders for most types of mechanical business equipment are still
slow. Oil development gear and food processing equipment are off
substantially from last year. Farm equipment remains severely
depressed. An airline recently announced a 'record' order for
aircraft, but the only firm order was for 20 aircraft to be
delivered starting in the fall of 1986. As a result of the decline
in the foreign exchange value of the dollar since February, some
District equipment manufacturers are receiving inquiries from abroad
again after a long lapse. Although there is only limited evidence
yet of increased orders for mechanical capital goods as a result of
the lower dollar, one District company reported that some orders are
being placed with domestic suppliers for types of machinery which
had previously been ordered abroad, in response to the shift in
relative prices.
Nonresidential Construction
Over the past year, and since the end of recession in 1982,
nonresidential building has risen more vigorously in the District
than in the nation, despite weakness in Iowa, but remains far below
the good levels of the 1970s. The rise in Michigan has been
strongest. Commercial construction, mainly stores and office
buildings, has accounted for much of the increase in activity,
Office vacancies are large and growing as new buildings are
completed. However, new starts on major office buildings in downtown
Chicago are expected. Commercial mortgage rates have eased about 1/4
percentage point since September, to 11 percent on 10-year loans and
11-1/2 percent on 15-year loans. The resale market for smaller
industrial and warehouse properties in suburban areas of Chicago has
strengthened significantly in recent months. Overbuilding in
industrial parks is being absorbed rapidly. But construction of
large manufacturing buildings is at a low level, except for motor
vehicle assembly plants and parts plants of domestic and Japanese
companies. Highway construction, mostly repaving, continues strong.
Residential Building
Construction of housing has continued to recover in the District,
but is still only about half of the pace of 1978. Recovery has been
uneven, with Michigan up most strongly, and Iowa weakest. Used home
sales, which did not fall off as sharply as new homes in the
recession, are highest ever (number of units as well as dollars) at
some large realtors. Residential mortgage rates have eased slightly.
Lenders and mortgage insurers are applying tighter standards, but
credit is readily available for qualified buyers. Last year's market
was dominated by first-time buyers. This year more sales have
reflected people "trading up". In the Chicago area, there has been a
strong rise in apartment construction, but from a low base and not
enough to approach past peaks.
Consumer Spending
Major District retailers report continued sluggish sales of general
merchandise. Inventories are mostly within a normal range. Appliance
sales have been good. Airline traffic has flattened, and excess
capacity has led to severe and widespread price cutting. Increases
in prices paid by consumers generally remain low, but rates for auto
and home owners' insurance are rising at least 5-6 percent this year
in most areas, and much more in some localities.
Agriculture
Lower meat production and an unusually heavy movement of grain under
price support loan with the Commodity Credit Corporation account for
most of the recent upturn in farm commodity prices. Corn and soybean
production estimates for District states were revised upward again
in November. Corn production is projected up 16 percent from last
year and soybean production up 24 percent However, wet weather
continues to delay completion of the fall harvest Hardest hit areas
include Iowa, Michigan, and Wisconsin. Some yield losses will likely
result, inflicting more adversity on the financially-stressed
farmers affected by the delays. But any weather-related yield losses
will not materially alter the fundamental situation of excess grain
supplies.