March 15, 1988
Summary
Expansion continues in District economic activity. Employment rose
in District states in January, seasonally adjusted, except in
Michigan where layoffs at auto and parts plants cut manufacturing
payrolls. For February, Chicago purchasing managers again report
robust increases in orders, output, and backlogs; higher
inventories; rising employment; longer delays in obtaining
deliveries; and widespread price increases. Reports from industrial
concerns show vigorously rising demand for equipment, steel, and
other industrial materials. Recently improved car sales and large
first quarter production cuts, including many at District plants,
are bringing auto stocks into better balance. Construction activity
in the District is viewed as likely to remain at a high level in
1988, but some segments are expected to be below 1987, notably
starts on commercial projects. Reports on consumer spending in early
1988 were mixed. Conditions and prospects are improving in
agriculture and related industries, with land values rising and farm
equipment sales higher.
Manufacturing
The industrial sector in the District continues the robust expansion
evident late last year. A maker of large construction machinery
reports some types of equipment on allocation, and the order backlog
highest in several years. Equipment orders from paper and steel
mills, for expansion and modernization, are described as "extremely
strong." Rising capital spending is also reported by makers of
chemicals and plastics. In response to the lower dollar, production
of equipment and components is increasingly being shifted back to
the U.S. from abroad, but this shift has been gradual because of
contractual relationships. Demand is up for mining equipment and
railcars, from low levels. Machine tool orders and backlogs are up
but remain far below strong levels of the late 1970s and early
1980s. Manufacturers continue to evaluate expansion projects
cautiously, particularly in heavy equipment industries which were
hard-hit by the severe downturn of the early 1980s. Closings of
older, inefficient plants in the District continue to be reported,
as part of producers' efforts to pare costs.
Motor Vehicles
In response to somewhat better than expected car sales, second
quarter auto production schedules have been adjusted upward almost
to levels of a year ago. The improved second quarter outlook follows
sizable first quarter reductions in assemblies at numerous plants in
the District. Permanent closing of another assembly plant, in
Wisconsin, was announced recently. Truck sales and production have
remained very strong.
Steel
Production at steel plants in the District continues strong. Orders
for cold-rolled and coated sheet are at good levels into the second
quarter, even with the cutbacks in auto output schedules. Hot-rolled
sheet and plate orders have increased reflecting investment projects
in the paper and petrochemicals industries. Buying of steel for
construction projects has been very strong, with no seasonal
downturn in bidding after the turn of the year. Increases are
reported in industrial construction projects, which are mainly
steel. Supplies are tight—customers would take more steel if they
could get it—resulting in upward pressures on prices. The volume
of steel shipped through steel warehouses continues to set records
month after month.
Construction
The picture for construction in the District is mixed, with activity
generally at a high level, but declining in some sectors. Building
activity in the District in January was lower than last year,
attributed to more normal weather this winter after exceptionally
mild conditions in early 1987, and lower residential mortgage
interest rates a year ago. For all of last year, contracts for
construction of nonresidential buildings in District states, in
square feet, were 11 percent above a year earlier, and residential
contracts were 5 percent higher—both stronger performances than
the nation.
Fewer starts on commercial projects in the Chicago area are expected this year, but most of the large amount of office space being built downtown is not scheduled for completion until 1989 or later, implying a high level of activity on projects already underway. Construction of Chicago-area industrial building is increasing, mainly light warehouse structures, after being very low. Strong leasing of Chicago-area industrial space is expected to continue. Industrial construction is also rising elsewhere in the District, including some new plants. Public works construction—highway, sewer, and water—will be strong in 1988.
Consumer Spending
February sales reports from large retailers in the District were
mixed. A survey of Illinois retailers for January showed a small
decline in total sales, attributed to weather, after a "healthy"
gain in 1987. A contact with a major retailer believes the consumer
sector is in better shape than many people think. Consumer
confidence is up; wages have accelerated (though not much); and
relatively large tax refunds are expected to boost spendable incomes
this year. General merchandise inventories are viewed as in
reasonable balance.
Farm Equipment
Unit retail sales of farm equipment continued well above year-
earlier levels in January, extending a trend that began in the
latter part of 1987. During the past seven months, farm tractor
sales were up 35 percent from the year ago pace and the highest for
the period in three years. Similarly, combine sales in the five
months ending with January were up 46 percent from a year earlier
and also at a 3-year high. Because of the surge in sales, unsold
inventories of new tractors and combines, relative to annual sales,
are now at the lowest levels since the late 1970s and early l980s.
The comparatively low inventories, coupled with expectations of at
least further modest gains in sales, raise hopes that long-depressed
farm equipment production in the District may begin to recover in
the months ahead.