Beige Book Report: Chicago
October 23, 1986
Summary
Our contacts believe prospects are favorable for further moderate
growth in the national economy in 1987, and continued price
restraint. Activity in the District, overall, still trails the U.S.
However, this year housing construction here has outpaced the
nation. Cutbacks in employment continue to be announced by various
major employers in the region, many in service sectors which had
avoided large layoffs in the past. Contacts report continued vigor
in consumer purchases, construction, and defense. Inventories are
low at auto dealers, general merchandisers. and many manufacturers.
Sales of paperboard, cement, gypsum board, and other building
product are at or near record levels. Exports of linerboard are up
sharply, helped by the lower dollar. Planned auto output is at high
levels into next year, but fourth quarter production has been cut
from earlier announced levels. Capital goods sales are slow. The
protracted strike at USX has boosted prices and volumes for other
steel producers. Crop losses due to heavy rains and flooding in
September and early October were extensive in parts of the District.
Overall corn and soybean losses, however, probably will be only
modest. The drop in District farmland values apparently steepened in
the third quarter.
Steel
The strike which has shut down USX since August 1 is helping other
District producers. There are no shortages. Inventories built ahead
of the strike by USX and its customers helped prevent supply
problems initially. Other U.S. companies have been reactivating idle
facilities. With longer leadtimes for sheet and other light
products, and fewer order cancellations, steel makers have scheduled
longer, more efficient production runs. Steel demand is described as
good for autos, appliances, construction, and steel service centers.
Weakness continues to be reported in steel for equipment, railroads,
and shipbuilding. Orders for use in the oil and gas sector also
remain very low but are up from near zero earlier this year.
Motor Vehicles
Auto output plans are at a high level into 1987. However, actual
production has fallen persistently short of plans in recent months.
Fourth quarter planned output has been reduced from earlier
projections, despite sharply lower inventories. Analysts think
record low financing rates and rebates pulled sales into model year
1986, and expect lower sales next year. Sales of light trucks, many
for consumer use, have been setting records. Medium truck sales this
year are expected by one of our contacts to equal last year's pace,
and to maintain this rate in 1987. Heavies are projected to be down
7 percent this year, and to stay near the l~86 pace in 1987.
Realized prices on heavy trucks are down about 3 percent this year,
and used truck prices have fallen substantially. Cutbacks in
employment in the heavy truck industry arc continuing. Announced
capacity reductions would raise utilization rates in this industry
from 58 percent recently to 71 percent, at current production
levels. A major domestic car and truck manufacturer has cut its use
of imported engines substantially, and plans further reductions.
Plant and Equipment
Except for commercial aircraft production (centered outside this
District) and the auto industry, capital spending is soft. No new
heavy plants are underway-auto assembly plants announced or being
built are not regarded as "heavy"--but there are reports that some
large new paper and chemical plants may be approved in the months
ahead. Offers of free plant sites or other inducements by states,
including Illinois and Indiana, continue to he reported for a
planned new Fuji-Isuzu auto assembly plant. Sales of capital
equipment generally remain slow. Steel castings demand is weak. A
Chicago-area foundry which specialized in large steel castings, and
which in the past employed tap to 2,800, is being shut down because
of the low volume of business. A maker of heavy-duty transmissions,
in cutting employment and reducing pay of those who remain,
characterized its markets as soft, with no improvement expected next
year. Farm machinery sales in Iowa this year have shown improvement
over very low levels a year earlier. A Chicago-area overhead crane
maker has been picked to supply the Chrysler-Mitsubishi auto
assembly plant being built in Illinois.
Construction
Heavy rains in parts of the District temporarily delayed
construction projects. Construction will continue at a high level
into 1987. The strongest rise has been in residential building,
though sales have eased somewhat since last spring. Permits for
residential construction in the 5 states were 24 percent above last
year for 8 months, versus a year to date gain of 4 percent in the
rest of the nation. Mortgage rates have fallen back below 10 percent
for 30-year fixed-rate loans at some area lenders, from more than
10.5 percent typically offered last summer. Residential building
District-wide is still well short of levels reached in the 1970s,
and particularly low in Iowa. In the Chicago area, contracts for
commercial construction for 9 months (square feet, F.W. Dodge data)
were 3 percent below last year's high level. Despite large discounts
being offered in some cases on effective rents, new projects
continue to be announced. Suppliers expect the vigorous pace of
office and retail building to continue into 1987 in some centers
including Chicago.
Consumer Spending
General merchandise sales slowed in September, after a good August.
Slackening in September was attributed partly to weather and strong
auto sales. Buying of appliances and household furnishings has been
strong. "Back-to-school" sales were the best in 7-8 years, and
Christmas sales are expected to be good. Inventories are low. Demand
is described as strong for other consumer goods and services,
including prepared foods, sort drinks, personal care products,
medical and surgical supplies, and auto repair. Airline passenger
miles have been up sharply, mainly due to widespread use of discount
fares. Major carriers are raising fares.
Agriculture
Heavy rains and flooding in September and early October caused
extensive crop losses in some areas and significantly delayed the
fall harvest throughout most of the District. Hardest hit is
Michigan, with estimated corn and soybean yield losses of 6 to 10
percent from earlier forecasts, and further downward revisions
likely. Losses in other crops—navy beans, sugar beets, and
potatoes—range up to 50 to 70 percent in a hard-hit area in Eastern
Michigan. Elsewhere in the District, if recent improved weather
holds, corn and soybean harvests probably can be completed with only
modest reductions from earlier projected record yields. Following
three quarters of a slowing rate of decline, the downturn in
District farmland values apparently steepened again this summer.
Preliminary results from our current survey of agricultural bankers
shows that District farmland values declined 4 percent in the third
quarter, and 13 percent in this year ending September 30. Sharp
reductions in crop prices since spring, and concerns about farm
program legislation that might reduce federal subsidies, doubtless
contributed to the escalating downturn.