Beige Book Report: Chicago
January 28, 1987
Activity has been sluggish in the Seventh District, but construction and retail sales have been surprisingly vigorous. Growth of total employment in the District continues to be less than in the U.S.; however, manufacturing employment rose recently, after an extended decline. Other steel makers continue to benefit from the 5 1/2-month strike at USX. Auto output has been cut back modestly, from high levels. Most lines of mechanical capital goods remain weak, reflecting limited demand from both domestic buyers and overseas, including less developed countries that had been good customers. Construction in major markets in the District continues vigorous. An expected slowing in offices and apartments is not yet evident. Consumer spending improved in November and December, through a broad range of products.
Employment
Total payroll employment rose less last year in the District's five-
state region, taken as a whole, than in the nation. However, Indiana
outpaced the U.S., reflecting strength in construction and various
services. In contrast, employment in Iowa declined. Total employment
in the five-state region finally has drawn even with peaks reached
in 1978-79. Employment estimates for Indiana and Wisconsin are 2
percent above previous peaks, but Illinois, Iowa, and Michigan are
still below that level. Manufacturing employment turned up in the
fourth quarter in the District states, along with the nation, after
trending lower for about two years. However, various employers
continue to announce plant closings and new reductions in staff.
Steel
Developments in steel have been dominated by the protracted USX work
stoppage begun last August 1. Other mills at the foot of Lake
Michigan are running at or near capacity for steel sheet, chiefly
for autos. A drop in industry shipments in November is thought by
industry analysts to reflect depletion of USX's inventories built up
before the strike. Unemployment benefits for eligible steel strikers
are nearly exhausted. Because start-up to full operation will take
6-8 weeks for its major mills, USX must return to work soon if it is
to get its share of the seasonally strong second quarter market.
Local press reports hint at progress toward settlement. Steel
imports continue above the Administration's market-share targets. A
larger share of imports is coming from countries whose currencies
have not declined versus the dollar.
Motor Vehicles
The surge in car and light truck sales at year-end, driven by tax
law changes, reversed a two-month inventory buildup. GM extended
holiday shutdowns at two District plants, and at several other
plants, most for two extra weeks, to control stocks. Industry
analysts expect car sales to fall in 1987, with domestic models
accounting for most of the drop. Another Japanese motor vehicle
assembly plant will be built for Fuji-Isuzu near Lafayette, Indiana.
Demand for larger trucks has improved, reflecting a rise in truck
freight tonnage over the past year and increased replacement demand.
Inventories of used trucks are down. The production rate for heavy
trucks has risen above 8 percent from 1986 lows. Trucking industry
adjustments in response to deregulation appear to be largely over.
Like autos, purchases of mobile homes and boats were boosted in late
1986 by tax considerations.
Equipment
Demand for most capital equipment remains soft. Cutbacks in auto
industry capital spending have adversely affected producers of
industrial robots, machine tools, and other capital goods. Heavy
construction equipment also continues weak. The top maker of earth-
moving equipment plans to close 3 more plants, including one in
Iowa. Demand by less developed countries for construction equipment
remains low. Two leading producers of mobile hydraulic construction
cranes are said to view these lines as "discontinued businesses".
Most of Deere's plants have been shut by a labor dispute since
August 1986. Despite the strike, stocks of farm equipment remain
ample because demand is extremely weak. However, stocks of light
construction equipment have become tight. Orders for railroad
equipment are virtually at rock bottom. The leading locomotive
producer halted output of new units indefinitely last November at
its Chicago-area plant. Demand for petroleum industry equipment is
very low, despite an upturn in drilling activity in the latter part
of 1986. In this and other lines, demand for new equipment is held
down by a market overhang of good used equipment. Demand for some
types of specialized equipment, including food machinery and airline
equipment, is reported slightly stronger. A steel company and a
large aluminum fabricator in the District plan substantial
upgradings of their facilities. Expansion plans are likely to be
raised in the chemical and paper industries because of pressures on
capacity.
Nonresidential Construction
Contracts for nonresidential building in District states in 1986,
through 11 months, were slightly ahead of last year, with Michigan
up substantially, and the other states somewhat lower. Construction
activity and bidding on commercial projects continue strong in the
Chicago area. Sales of commercial and industrial buildings surged at
year-end to beat the new tax law. Commercial construction activity
in this area is expected to fall 10 percent or more in 1987, but
shows no clear evidence yet of doing so. Some proposed office
buildings have been postponed awaiting anchor tenants. However,
others are being pushed ahead, including several of over 1 million
square feet. Activity in December and January was boosted by mild
weather. Repaving and other highway work will be abnormally low
until federal funding is restored.
Residential Construction
Homes and apartment construction was up strongly in 1986 in many
District centers. Conditions varied widely, however. Areas dominated
by agriculture and heavy industry remain depressed. Shortages of
skilled tradespeople, particularly carpenters, in the Chicago,
Indianapolis, and Detroit areas have put upward pressures on
builders' costs. Some analysts expect housing starts in the Chicago
area to fall in 1987 due to fewer multifamily starts. A survey of
landlords indicates that apartment rents in this area will rise only
3.8 percent, on average, in 1987, much less than would be needed to
cover the adverse effects of tax reform on cash flow from new
apartments. Markets for condominiums have improved, as the excess of
"investment condos" has been worked down. Home resales were up
strongly in the Chicago area in 1986, and this up-trend continued
into January 1987. Used home prices in the area rose an estimated 14
percent on average in 1986. Detroit and Milwaukee resales also rose
strongly in 1986, with further growth expected in 1987. Interest
rates on fixed-rate home mortgages are predominantly in the 9 to
9.25 percent range, but lenders increasingly are cutting rates below
9 percent. Particularly attractive fixed rates, e.g. 8.5 percent,
attract lengthy waiting lists of would-be applicants. Initial rates
on adjustable rates loans vary widely, with some below 7 percent.
Consumer Spending
District reports on department and chain store sales indicate
improvement in November and December. Sales of most types of general
merchandise were described as good, especially apparel, toys, and
home furnishings. An Iowa producer of major home appliances is
adding workers to meet strong demand. Mild weather has restrained
sales of weather-related consumer products. Inventories are
generally in good shape, but somewhat low for fast-moving items.
Credit use continued heavy through the Christmas sale period. Price
increases on imported items due to the lower dollar and trade
restraint, have not yet appeared at retail in most cases, but will
be increasingly evident in 1987.