August 5, 1986
Summary
The pace of activity in the District, overall, continues short of
the nation. Employment in the five states has been about flat since
early 1986, compared with growth for the country as a whole.
Illinois and Iowa are about even with a year ago, in contrast with
2-3 percent growth in Indiana, Michigan and Wisconsin. Hardly anyone
is expecting a recession and 1987 is expected to see improvement.
Manufacturing jobs have fallen more sharply since January in the
District than the nation. Purchasing managers in Chicago report
continued though slower growth in production through June, but
Milwaukee buyers say output, orders, and backlogs have slipped
substantially. Bright spots in the region's economy remain
residential building and sales, and related spending on appliances
and furniture. Tourism is up strongly according to reports from
Michigan and Wisconsin. Auto sales are at a high level, supported by
manufacturers incentive programs, and company projections indicate
1986 will be very close to last year's record for car/truck sales
combined. Heavy trucks are down sharply. Capital goods remain weak.
Nonresidential building remains robust but is beginning to show
signs of slipping, particularly renovation work. A diversified
producer of consumer and industrial goods indicates that the
improvement in demand expected in most lines has not developed. The
District has seen excellent crop growing conditions, in contrast
with the devastating drought in the Southeast. Crop prices have
declined sharply in recent weeks, in anticipation of a large
harvest. Livestock prices have risen, and livestock farmers are also
benefiting from lower feed costs. District farmland values continued
to fall in the second quarter, but not as fast as in earlier
quarters.
Residential Construction
The residential building boom continues in many parts or the
District. sparked by lower mortgage rates, though some areas remain
depressed. Contracts, in square feet, in the five states were up 31
percent in the first half from a year ago, but to about two-thirds
of the 1978 level. In the Chicago area, both single-family and
apartment construction are sharply higher this year. Apartment
vacancies are described as low here, in contrast with some other
parts of the country. Heavy resales and refinancings continue to tax
facilities. A large backlog of mortgage loan applications slows
processing and closings. There are few takers for adjustable rate
loans, quoted rates as low as 7.75 percent in the Chicago area
versus around 10.5 percent commonly quoted on 30-year fixed-rate
loans.
Nonresidential Construction
There are signs of emerging weakness in commercial construction.
Work on new office buildings continues at a very vigorous pace, but
starts on several large commercial buildings in the Chicago area
have been delayed recently. Some have been rebid, with new bids
often lower. Renovation of existing commercial structures has
slowed. Some observers are increasingly concerned about rising
vacancies at the many suburban "strip" shopping centers currently
under construction or built in recent years. Others are optimistic
that the vigorous rise in residential construction is creating a
need for this additional retail space. Demand has picked up for
Chicago-area industrial space, primarily for warehouse and
distribution use rather than manufacturing. Speculative building has
increased, from very low levels a few years ago. District-wide
nonresidential construction contracts in this year's first half were
17 percent above a year earlier, in square feet, with only Iowa
lower.
Consumer Spending
A major general merchandise retailer reports that sales have
continued at good levels, with appliances and home furnishings
strong, and apparel relatively weak. The share of goods bought on
credit has fallen slightly, and credit delinquency rates are down
moderately. Wisconsin tourism officials say activity and inquiries
are up 7 to 30 percent, and expect a "banner year". Airline travel
(revenue passenger miles) is up helped by lower fares.
Motor Vehicles
Sales of autos and light trucks remain near record levels, supported
by low interest rates offered by captive finance companies of major
auto makers. These cut-rate financing programs are placing strains
on various groups. An auto leasing company complains that it can no
longer sell its used cars profitably because demand has been
diverted to new cars. A trade group of consumer lenders is seeking
to have the programs declared illegal on anti-competitive grounds.
Sales of medium trucks are ahead of a year ago, but heavies are down
to a rate of around 120,000 units, versus 140,000 last year.
Deregulation has greatly improved efficiency in trucking. As current
heavy truck production is far short of industry capacity, shutdowns
of 2 plants in other parts of the country may do little to ease
pressures on District producers.
Steel
Order trends suggested a "normal" seasonal decline in mill shipments
from the second quarter to the third. For the year, an industry
analyst expects shipments nationally to decline to about 72 million
tons this year from 73 million in 1985. Raw steel production is
expected to fall more because of increased use of continuous
casting, which yields a higher ratio of finished product. The share
of raw steel produced in the Seventh District this year
(approximated by AISI's Chicago and Detroit districts, through mid-
July) has slipped to 36.1 percent of the nation from 36.7 percent in
1985. Steel for autos and construction continues at good levels,
capital goods remain weak, and the oil/gas market is in a state of
collapse. Customers have been shifting orders away from steel
companies that have not settled their labor contracts—currently,
USS. Industry observers view the bankruptcy filing by LTV Corp as
ominous for a relatively inefficient large Chicago mill.
Capital Goods
Sales of capital goods remain weak. Machine tool orders, which had
recovered partially from recession lows, have again dropped below
shipments, eroding backlogs. Recent weakness is attributed partly to
uncertainties over tax law changes. A major District machine tool
maker has announced further substantial staffing cuts. Sizable
layoffs also have recently been announced or are expected at a
producer of paving equipment and a maker of lift trucks in the
District. Markets for industrial diesels remain very depressed.
Agriculture
District farmland values declined again in the second quarter, but
the rate of decline continued to slow. Preliminary results from our
latest survey of agricultural bankers indicate that District
farmland values declined nearly 2 percent in the three months ending
June 30. The latest drop compares to declines of 3 percent in both
the first quarter and the fourth quarter of 1985, and 4.5 to 6
percent in the first three quarters of 1985. Credit conditions at
District agricultural banks reflect weak farm loan demand, ample
liquidity for lending, a high proportion of problem farm loans, and
declining interest rates. As of midyear, interest rates charged by
agricultural banks on farm operating loans averaged just over 11.75
percent, down 85 basis points from 6 months earlier and 110 basis
points below a year ago.