March 16, 1987
Summary
A mild winter in the Seventh District has boosted activity, and
resulted in fewer than usual seasonal layoffs, particularly in
construction. Residential building continues vigorous. Construction
of office buildings remains strong in downtown Chicago. Industrial
construction has slowed. Several more plant closings in the District
recently have been announced. Slower car sales have led District
producers to scale back production and increase layoffs, but total
planned motor vehicle production in the first half is near year-earlier levels. Appliance buying continues at a high level. Supplies
of steel for autos and appliances are reported tight as USX
gradually returns to production following a labor settlement. Demand
for mechanical capital goods remains soft. Though the farm sector
continues under serious stress, farm earnings have improved and the
decline in farmland values has slowed.
Nonresidential Construction
Building activity has remained strong, partly because of the very
mild winter. Progress on some projects in the Chicago area
consequently is three months ahead of schedule. Several more large
office buildings have been announced or are being started in
downtown Chicago. Slower activity on new commercial buildings had
been expected but is not yet evident, though renovation work has
slowed. Construction of manufacturing buildings in the region has
weakened.
Residential Construction
The mild winter boosted residential building in the Midwest.
Building permits in January, normally very low, were sharply higher
than last year in Illinois, Michigan, and Wisconsin. Home mortgage
interest rates in the Chicago area have stabilized at around 8.75-9
percent for 30-year fixed rate loans, and 7-8 percent for the first
year on adjustable rate mortgages (ARMs). Our contacts indicate that
area lenders are increasingly using interest rates above first-year
rates in determining whether would-be borrowers qualify under their
ARM programs.
Motor Vehicles
Plans for car and truck production in the first half remain near
last year's levels despite slow sales in January and February.
Output reductions scheduled by domestic producers are largely offset
by increases at 'quasi-domestic'—U.S. assembly plants of foreign
producers—located outside the District. Quasi-domestic plants being
built in Illinois, Indiana, and Michigan are not yet in operation.
Slower sales have led to more layoffs at some District plants.
American Motors announced plans to close its Wisconsin assembly
plant in 1989, but subsequently agreed to resume critical
negotiations over labor concessions. Demand has improved for heavy
trucks and related components such as diesel engines.
Consumer Spending
Major chain stores in the District reported further gains in sales
in January and February. Sales of household appliances continue at a
high level. A District producer of large appliances again added to
employment to meet strong demand. Production of television sets at
an Indiana plant is being increased 30 percent, as the producer
reduces its purchases of TVs made abroad.
Capital Goods
Demand for capital goods produced in the District remains slow,
overall. Sales of industrial robots are projected to fall 30 percent
in 1987, chiefly because of capital spending cuts by the auto
industry. Machine tools, large construction equipment, and railroad
equipment continue weak. A District producer of sophisticated
medical equipment will cut costs by buying, rather than making,
certain components and reducing area employment 23 percent. North
American sales of farm equipment, of which the District is an
important producer, are projected to stay around 1986's low level in
1987.
Steel
Following settlement of its 6-month work stoppage, USX announced
plans to leave shut, probably permanently, more than one-fourth of
its steel-making capacity, at plants outside of the District.
Despite ample total steel capacity, supplies of steel sheet have
remained tight as USX gradually has returned to production. Two
other integrated steel-makers with plants in the District announced
plans for sizable investments in facilities.
Agriculture
For the deeply distressed farm sector, recent developments cast a
somewhat more optimistic tone. Farm earnings continue to improve
because of massive federal payments, lower production costs, and
better returns to livestock producers. Higher earnings have
contributed to faster repayments on farm indebtedness and
indications that the previous up-trend in problem farm loans at
banks reversed in 1986. Exports of some agricultural commodities
have exhibited a sustained upturn in recent months. But prospects
for corn and soybean exports, which are vital to this District's
farmers, remain dismal. Farmland values continued to decline through
late 1986, but at a slower pace. Moreover, declining mortgage rates,
new Federal Land Bank policies for liquidating acquired farm
properties, and recent changes enhancing the attractiveness of the
federal government's 10-year program for retiring land from
production have raised hopes that land values may be close to a
bottom.