Beige Book Report: Chicago
December 1, 1986
Summary
Trends in employment indicate that the pace of activity in this
District continues to trail the U.S. Additional layoffs and plant
closings recently have been announced in several industries. Capital
goods demand generally remains weak. Auto production schedules have
been reduced but remain near year-earlier levels. Consumer spending
and residential investment are relatively strong. Commercial
construction, mainly in the Chicago area but also in other District
centers, continues at a high level. Some holders of real estate and
other assets are pushing to dispose of these by year-end to receive
more favorable tax treatment. Prices paid for materials and
components increased significantly in October for steel and various
other items. A large retailer reports prices of textiles rose after
import restrictions were imposed. Livestock and dairy farmers have
been helped by low feed costs.
Plant Closings and Jobs
District companies in several industries continue to announce
reductions in employment and shutdowns of manufacturing plants and
other facilities. Most notable is General Motors' planned closing of
7 manufacturing plants and part of another plant in the District,
currently employing more than 20,000. Cummins Engine, a leading
diesel producer, plans to close two plants in the District employing
1,500. We are informed by industry analysts that the GM and Cummins'
plant closings are part of broad programs to reduce capacity.
Operations will be consolidated in other plants. Other closings
recently announced include a computer parts distribution center in
Indiana, a town's largest employer with 1,000 workers; an Illinois
hog processing plant, 780 employees; two motor vehicles parts makers
near Chicago; and the Michigan headquarters of a machine tool maker.
Reasons cited for these closings include foreign competition, excess capacity, high labor costs, and mergers. A Chicago-based paper company is cutting 1,000 jobs after a merger, and its local headquarters is expected to close. At least two more tire manufacturing plants in Illinois and Iowa are likely to be shut down. Additional jobs cutbacks have been announced in computers, health care products, banking, machine tools, and heavy-duty transmissions. On the plus side, additions to employment totaling nearly 400 are planned by two consumer appliance makers in Iowa, a response to strong demand. Also favorable are the expansion plans of Japanese vehicle producers in several locations.
Capital Goods
Demand for mechanical capital goods remains weak. The market for
industrial diesel engines is very slow. Orders for machine tools
have declined. Oil and gas development equipment continues
depressed. The last U.S. producer of 50-100 horsepower tractors
plans to close its Michigan plant, and shift all production to
Europe. Most smaller tractors have been imported for years. The
Department of Justice has signaled that it will raise no antitrust
objections to consolidations that would reduce from four to two the
number of U.S. producers of large four-wheel-drive tractors. Deere,
shut down by a strike since August 1, has offered aggressive
incentives to reduce tractor and combine inventories, including big
discounts and zero-interest financing for up to two years. Orders
have slumped for air conditioning equipment for office buildings, as
construction nationwide has turned down.
Motor Vehicle
Auto production schedules have been cut from earlier plans but
remain at high levels through the first quarter of 1987. Heavy truck
orders have improved slightly. Sales of heavies are projected by one
analyst at 125,000 in 1986 and 130,000, possibly up to 140,000, in
1987.
Steel
The work stoppage at USX since August 1 has boosted demand for other
steel producers. A leading Chicago-area producer is now operating at
effective capacity, in part reflecting a reduction by one-third in
the firm's capacity. Steel prices have increased on new contracts,
but most integrated producers arc still losing money. Analysts
expect prices to fall once the USX labor dispute is settled. Orders
for steel from capital goods producers remain weak. Oil and gas
industry demand for pipe is up, from a very low level.
Inflation
Prices paid rose at an "alarming rate" in October, according to the
Purchasing Management Association of Chicago. Higher prices were
reported for a broad range of products and materials. Largest
increases were for steel sheet and plates, related to the work
stoppage at USX, and also to the Administration's partially
effective program to limit steel imports. Other categories with
higher prices included corrugated and kraft paper, wood, caustic
soda, resins, and precious metals. One airline analyst discounts
reports of a renewed "fare war."
Nonresidential Construction
Work on office buildings in downtown Chicago continues at a vigorous
pace, despite high vacancies. Some projects have been deferred for
lack of sufficient preleasing, but others already underway assure a
high level of activity into 1987. Manufacturing building is low
except for warehouse facilities in locations well-served by major
roads. Highway work is slowing rapidly because Congress did not pass
enabling legislation prior to adjournment.
Residential Construction
Home building is well above last year in many parts of the Midwest
including the Chicago area. Multifamily starts also are up
substantially in the Chicago area. Thirty-year fixed-rate mortgages
are commonly being offered at rates ranging from 9.5-9.75 percent.
Mobile home shipments by Indiana builders, a major center of this
industry, are higher this year, in contrast with a declining
national trend.
Consumer Spending
A large general merchandise chain project a sizable rise in general
merchandise sales in 1986, with prices up only slightly. A smaller
rise in dollar sales and larger price increases are expected in
1987. Restraints on textile and apparel imports are blamed for a
recent jump in prices in those lines, which had been stable. Airline
traffic was up strongly in September and October, with prices
stable. A consultant expects consolidations and resulting cost cuts
to improve profitability in 1987. Second mortgages are being
advertised extensively by banks, S&LS, and other lenders. Some
advertisers are holders of first mortgages. Second mortgages are
being advertised as a way of tapping accumulated home equity and
avoiding loss of interest deductibility under the new tax law.
Agriculture
Bumper corn and soybean harvest estimates were raised recently for
Iowa and Wisconsin, contrary to many analysts' projections following
heavy September-October rains. Production estimates were cut
slightly for Indiana. Prices remain low but have edged higher in
recent weeks. A feared storage crunch was lessened by a stretched-
out harvest season, caused by heavy rains and attractive options
offered to farmers which encouraged them to redeem PIK certificates
and sell their grain rather than store it under the government's
support program. Returns to livestock producers are quite favorable
because of low feed costs and higher prices for cattle and hogs.
Dairy farmers also are benefitting from lower feed costs. Milk
prices have recovered to year ago levels as cuts in dairy cow
numbers, from the whole-herd buy-out program, and strong gains in
commercial demand for milk have trimmed the milk surplus.