Beige Book Report: Chicago
June 21, 1989
Summary
Indicators of overall business activity in the District are giving
mixed signals. Payroll employment in the five states, through April,
trended upward from late 1988 at a somewhat slower rate than last
year, about in line with the nation. However, employment measured in
the household survey for Illinois and Michigan fell in May for the
third straight month. Chicago-area purchasing managers reporting
increased production in May continued to outnumber those noting
declines, but by a smaller margin than since early 1987, and orders
and backlogs slipped. Motor vehicle sales below last year's pace,
despite attractive buyer incentives, have prompted limited
production cuts. Markets for many types of industrial machinery
still appear strong, though weakening has been reported in some
equipment markets, including light construction equipment,
communications equipment, and some other electronic types.
Industrial construction is strong in the region. Office construction
continues at a brisk pace in downtown Chicago. Recent rains have
improved crop prospects in most District states.
Equipment
Demand continues vigorous in many industrial equipment markets.
Orders for industrial diesels, for applications other than in large
trucks, are described as strong in domestic markets and for export,
except from manufacturers of light construction equipment,
reflecting the slowdown in housing construction. Demand at producers
of highway construction equipment was characterized as very strong.
Robust orders have been reported recently at foundries, metal
fabricators, and machinery builders. Incoming orders for machine
tools have slipped, particularly from foreign buyers, but backlogs
remain far above year-earlier levels. One large machine tool builder
expects its order backlog to support continued increases in
shipments in this year's second half. Orders have weakened for
communications equipment and some other electronic types.
Construction
Indicators of construction in the District continue to show a
relatively robust pace of activity. For example, year-over-year
increases in shipments of cement and gypsum board to District states
have been larger than nationwide (though this partly reflects the
mild January weather in the region). Strong demand for downtown
Chicago office space and relatively few completions of new buildings
this year have lowered the vacancy rate (as defined in two recent
surveys) to less than 10%, encouraging plans for additional
buildings. The market for Chicago-area industrial property is also
strong. In Detroit, ground was broken recently for a $1 billion auto
assembly plant, a replacement for an aging plant. Preliminary site
work is very strong for office buildings and industrial facilities
in the Milwaukee area. Construction activity on houses is said to be
holding up well around Chicago but sales of existing homes slipped
this spring as mortgage interest rates climbed above 11 percent.
Rates typically offered on 30-year fixed-rate loans have since
fallen to a 10 percent to 10-1/4 percent range, and below 10 percent
at some area lenders.
Motor Vehicles
Sales of motor vehicles continue to trail year-ago levels despite
recently enhanced incentives which a contact described as the most
attractive for buyers in at least 2-1/2 years. Extended model
changeover shutdowns have been announced for some District assembly
plants; another plant was recently shut for one week to control
inventories; and a planned start-up of a second shift at a car
assembly plant was cancelled. But overall production cutbacks have
been modest. Heavy truck plants have been running close to effective
capacity.
Steel
Steel demand continues strong. A Chicago-area integrated mill is
hiring summer help, for the first time in about a decade, to cut
excess overtime of regular employees. However, there have also been
reports recently of some slippage in orders, perhaps only seasonal.
Steelmakers have announced additional large investments, including
another new plant to be built in Indiana and major upgrading of an
existing facility in that state.
Retailing
A contact described retail sales recently as satisfactory, but
generally less so than earlier this year. Cooler weather may have
deterred some retail sales in the Midwest in May. This retailer
viewed consumer spending as supported by good income gains this
year, but indicated concern about surveys showing increased consumer
pessimism regarding inflation, interest rates, and home buying
prospects.
Agriculture
Early season crop prospects over most of the District have benefited
considerably from recent rains. In Indiana, however, the rains have
further delayed the wind-down of the planting season and stressed
some early-planted crops. Late spring frosts apparently caused some
fruit and vegetable losses in Michigan. While no official
tabulations have been made, some observers characterize the losses
as "less than expected."
Labor Markets
District labor market conditions show considerable diversity.
Unemployment has declined in the District, as utilization of labor
resources has pressed against available supply in many areas.
Unskilled industrial labor, for example, is in tight supply in
Chicago's western suburbs, and pay levels have been pushed upward,
squeezing profits of employers competing with firms in lower labor-
cost areas. The seemingly chronic shortage of some industrial
skills, such as experienced welders and machinists, may have been
exacerbated by the industrial upturn of the past 2 years. Employers
in local areas where labor is tight—parts of Indiana, for example—are advertising for skilled workers in areas where there were
sizable lay-offs a few years ago. Job-hopping in pursuit of higher
pay reportedly has increased. But employers in some industries
continue to press for concessions, indicating a willingness to shut
facilities or replace striking workers in order to bring down labor
costs, in some cases citing costs at competitors. Industries in the
District in which this has been taking place include auto parts
manufacturing, grocery stores, and truck transport. Jobs remain hard
to find in some white-collar occupations. Staffing cutbacks or
curtailments on hiring continue in response to, or to stave off the
threat of, corporate reorganizations.