September 6, 1988
Summary
Reports on business activity in the District generally indicate
solid expansion into the second half of 1988, though the rate of
rise in activity appears to be less rapid than in the first half.
Upward pressures on prices continue. Manufacturers in this region
have been helped greatly by the strengthening in demand for capital
equipment. Better-than-expected consumer spending for motor vehicles
continues to support upward-revised production plans at plants in
the District. Sales of major appliances have stayed near last year's
record pace. Construction activity, in the aggregate, appears to be
slowing. The drought has adversely affected the farm sector and some
nonagricultural industries but boosted activity in a few other
industries.
Labor Markets
Employment growth in the District states through this year's first
half was somewhat slower than the nation in part reflecting first
quarter layoffs at auto assembly and parts plants. Unemployment has
been below 5 percent of the labor force in Indiana and near 4
percent in Iowa and Wisconsin. Illinois and Michigan rates have been
above other District states and the nation. Labor markets have
tightened in parts of the District but wage gains generally remain
restrained, with some firms seeking concessions.
Motor Vehicles
Sales of domestic cars have remained strong, and domestic truck
sales have set a record pace. The industry has been boosting
production schedules to meet demand, following cuts earlier this
year. Car assemblies in calendar year 1988 are projected about even
with 1987, and truck production is expected to be highest ever. A
large domestic producer assembling trucks on overtime is reported to
be looking into expanding capacity, possibly using recently
shuttered plants of another producer.
Steel
Production of steel slowed seasonally during the summer but is
expected to come back strong. Some scheduled maintenance has been
deferred in order to keep output at a high level. Mill shipments for
the year are projected highest since 1981. Among steel's major
markets, domestic motor vehicle production has been revised upward
this year; demand for steel from machinery makers has increased
considerably; plant investment is rising in chemical process
industries—paper, chemicals, petrochemicals, and refineries; and
construction steel has stayed strong. Steel mill inventories are
thought to have risen in July but are not excessive. Steelmakers in
the District are investing in projects to boost quality and
productivity.
Other Manufacturing Industries
Demand for a wide range of machinery types continues to rise, in
many cases from low levels. Increased costs for materials are
squeezing profit margins, however. Machine tool orders are double
the year-ago pace. Railcar orders have doubled and backlogs have
tripled. Demand for truck trailers is expected to stay strong, about
at last year's pace. Construction machinery sales have improved
sharply, encouraging investments in upgrading manufacturing plants.
Major home appliance shipments are expected to be second-highest
ever this year, 4 percent below 1987. Recreational vehicle sales are
projected 8 percent above last year.
Construction
Construction activity is at a fairly high level in the District, but
segments of the industry are slowing and further slowing appears in
prospect. Contracts for construction of nonresidential buildings, in
square feet of floor space, were 5 percent lower in the first half
than a year earlier in District states. Residential construction
contracts were 11 percent lower. In contrast, first half shipments
of gypsum board in District states were 1 percent higher than a year
earlier, reflecting finishing work on projects begun earlier.
Apartment construction is weak, and home building has also started
to slip. Further slowing is expected in response to higher mortgage
interest rates. Industrial building is strong in the District.
Office construction remains strong in downtown Chicago, though below
the record pace of recent years, and also has been strong in other
District cities including Des Moines, Indianapolis, and Milwaukee.
Office construction is slowing in suburban Chicago, and is expected
to slow in downtown Indianapolis. Total Detroit area nonresidential
construction probably peaked last year. Some types of public works
construction are very active including streets and highways.
Consumer Spending
Apparel sales, particularly fall merchandise, were hurt by hot
weather in July after a stronger performance in June. Markdowns were
described as widespread, depressing dollar volumes. Contacts
expressed concerns about overbuilding of retail space in some areas.
Drought Effects
The drought, relieved somewhat by increased rainfall and cooler
weather in recent weeks, has cut crop yields sharply and pared farm
equipment sales. Barge traffic was cut by low water levels, helping
rail and Great Lakes transport alternatives to barges. Other
industries which gained as a result of the drought include pump
manufacturers and well drilling. The absence of rain earlier in the
summer allowed construction projects to proceed ahead of schedule.
Demand for farm equipment, grain storage facilities, and landscaping
supplies and services may come back strong next year.
Agriculture
Crop losses due to the drought were sharper in the District than in
the nation. The USDA estimates year-to-year declines of 42 percent
in District states' corn production and 27 percent in soybeans.
Higher feed costs have squeezed livestock producers' margins.
However, recent disaster assistance legislation will cushion adverse
drought effects on crop and livestock farmers. District farmland
values rose during the second quarter but more slowly than in the
previous four quarters. Although the District as a whole was up 1
percent from three months earlier, gains were not reported in all
five states. Contacts were less optimistic than earlier about the
near-term trend in farmland values.