March 20, 1986
Summary
Reports from respondents and other information indicate that
moderate overall expansion in the Seventh District continues. The
plunge in oil prices and the recent sharp drop in interest rates
(which some analysts believe is related to lower oil prices) are
contributing to favorable expectations regarding the economic
outlook. Chicago purchasing managers reported a healthy upturn in
orders and production in January and February, but not in
employment. Commercial and industrial electric power usage in the
region has been on an upward trend since last summer, breaking the
sluggish trend of recent years. Construction activity continues at a
vigorous pace in portions of the District, notably the Chicago area
and southeast Michigan, but is soft in other areas, particularly in
Iowa, primarily an agricultural state. Demand for motor vehicles
remains strong, but will require ongoing incentive programs. Orders
for steel are improved. Employment growth in this region continues
to trail the nation. Heavy emphasis on cost containment, merger-
related staff reductions, and plant closings have restrained hiring
and caused layoffs, in a wide range of industries. Agriculture
remains depressed. Farmers are confused over details of the recent
farm legislation.
Labor Markets
After more than three years of expansion, payroll employment in the
District is 3 percent below the late 1970s, with only Wisconsin
higher. Manufacturing in the five-state region is 21 percent below 7
years ago, with Illinois down 27 percent. Numerous firms in various
industries continue efforts to increase efficiency and
competitiveness, by controlling costs, often through layoffs.
Mergers and acquisitions often bring job cuts as positions deemed
duplicative are eliminated. In some cases, job cutbacks result from
work being shifted abroad. Examples include processing of
manufacturers' coupons in Iowa and manufacturing of material
handling equipment in Michigan. Announcement of 3,300 jobs to be
filled at Mazda's new Michigan plant brought 110,000 requests for
applications. Temporary layoffs to control inventories have recently
been announced in railroad equipment and farm equipment. Permanent
job cuts, often following earlier staffing reductions, have recently
been reported in various industries including steel, trucking, farm
equipment, medical technology, hospitals, communications gear,
chemicals, and gas transmission. In some cases, job cuts are
associated with shutdowns of production facilities.
Plant Closings
Producers of several lines of heavy capital goods in the District
are responding to feeble recoveries with temporary and permanent
plant closings. The leading producer of locomotives will cease
production for two months at its main plant in the Chicago area and
lay off 2,000 because of slack orders. An extended summer shutdown
is planned at an Iowa farm equipment plant. Permanent plant closings
are planned by a maker of home videodisc equipment, a manufacturer
of parts for transmissions, and a producer of heavy forgings. A
major producer of material handling equipment will shift one-third
of its manufacturing overseas, and permanently close plants in
Michigan, which had been its main facilities. In contrast, a large
maker of construction equipment cancelled plans to shift certain
output abroad, due to a more favorable cost picture at home.
Threatened phaseout of auto assemblies at an Illinois plant was
averted as a labor pact was reached after hard bargaining.
Nonresidential Construction
The office building boom is continuing in downtown Chicago. Despite
an apparent glut of space, announcements of major new structures
still appear. Soil testing work, in advance of construction, also
continues at a good pace, despite concerns that contracts were being
shifted from 1986 into 1985 to grandfather current tax treatment,
and would slacken after the turn of the year. The pace of office
building is reported to be slackening somewhat in suburban areas
where it has been strong. Highway renovation definitely will be at a
high level again in 1986, because funds are set aside, and work is
sorely needed.
Home Building
Spurred by sharply lower mortgage interest rates, home construction
is expected to remain at a high level in many parts of the District
in 1986, relative to the early 1980s, though still well short of
peaks in the 1970s. The upturn has been particularly vigorous in
southeast Michigan, while activity in Iowa has been slipping. Demand
for existing homes is strong in some areas, and realtors complain of
a paucity of listings. The move-up share of the market has been
larger than earlier in the expansion. A heavy volume of refinancing
of existing mortgages at lower rates is underway.
Steel
District steel producers report improved orders and output. Demand
from motor vehicle makers is in line with that industry's high
production schedules. Activity has been very strong at steel service
centers, which are doing more processing and holding more inventory
for customers. User inventories are low and expected to rise. Prices
are firming but remain low. Imported steel prices have risen, but
much less than would be indicated by the fall in the dollar. Price
increases will be reflected in steelmakers' revenues gradually as
existing contracts expire.
Motor Vehicles
Vigorous car production plans, bolstered by a new round of sales
incentives from major domestic automakers, promise a high level of
activity at District assembly plants and parts suppliers in 1986.
Forecasts for motor vehicle demand in 1986 generally call for a
decline in total sales from 1985, and an increase in import market
share. Japanese renewal of their quota on auto exports to the U.S.
at last year's level supports this projection. A leading District
producer of motor homes has sharply increased production, partly
because of completion of an inventory adjustment in 1985, and partly
in anticipation of increased demand resulting from lower gasoline
prices.
Consumer Spending
Major chain stores in the District report 1986 sales ranging from
small declines to modest increases. Retailers blame weather
problems, high consumer debt levels, and generally cautious
attitudes for the anemic performance of sales. The sharp drop in oil
prices since late 1985 should bolster consumers' discretionary
income, and may tend to raise forecasts for consumer spending.
Agriculture
Prices of farm commodities important in the District have trended
lower since mid-January, pressured by seasonally large supplies and
weak demand. Corn and wheat exports will decline again this year,
probably by more than current USDA forecasts. Soybean exports,
however, are rising. Exports will benefit eventually from lower U.S.
support prices, lower oil prices, and the lower value of the U.S.
dollar. A flurry of late Congressional actions created confusion
over details of various federal farm income and price support
programs. Farmers must decide whether to participate in these
programs within the next few weeks, as planting decisions are
finalized.