September 20, 1989
Summary
Contacts in the District report slower growth in activity in some
industries and declines in others. Total payroll employment in the
five states, through July. showed only a sluggish increase from
year-end 1988 levels (seasonally adjusted), and manufacturing
employment was lower reflecting, in part, cutbacks at motor vehicle
plants. Chicago purchasing managers in July and August reported
lower production, orders, and backlogs, faster deliveries, and
continued easing of inflationary pressures. However, the July-August
softness may have been partly seasonal, in contrast with a year
earlier when usual summer shutdowns in some industries were
shortened. Uncertainties over the extent of possible further
cutbacks in motor vehicle assemblies, particularly if stronger sales
in July and August prove temporary as some expect, overhang that
industry and its suppliers. The pattern in machinery markets is
mixed, with demand continuing strong in some industries and slowing
in others. Lower mortgage interest rates, partly reversed since
August lows, have stimulated an upturn in nonresidential and
residential sales and lending activity. Sales of consumer durables
are expected to remain slow. Crop conditions have improved in much
of the District, helped by rainfall in August.
Manufacturing
Recent reports from contacts with industrial firms show business
activity growing more slowly than earlier this year in some sectors
and declining in others. This slowdown in the third quarter appears
to reflect in part a return to a more "normal" pattern of July and
August shutdowns in several industries in which such plant closings
for vacations, maintenance, and model changeovers had been shortened
or largely foregone in recent years. Uncertainties regarding the
extent of upcoming cutbacks in car and truck production continue to
overhang suppliers as well as motor vehicle producers. Industrial
materials are more readily available than earlier, and pricing
pressures have eased with price increases less widespread and
decreases more common.
Machinery markets have turned increasingly mixed over the course of this year, after widespread improvement last year. Sales of construction equipment are below last year, except highway construction equipment, which is higher. Mining equipment sales are quite strong, partly to meet long deferred replacement demand, but a general decline in minerals prices is expected to lead to lower sales next year. Diesel engine demand, robust virtually across the board earlier this year, is less vigorous with some markets softer including heavy trucks, marine equipment, and generating equipment. Machine tool orders have slowed while shipments have picked up, eroding backlogs. Farm equipment demand has strengthened substantially this year.
Though motor vehicle sales have picked up in the third quarter, this rise is attributed by observers to enhanced incentives and concerns about higher prices in the 1990 model year. A contact with a supplier to the industry thinks planned fourth quarter production cuts may be inadequate to bring inventories back into line. However, the sharp cuts in auto assemblies scheduled by the "Big Three" are being partly offset by large increases at plants partly or wholly owned by foreign companies, most of which are located in or near this District and are supplied by components makers located here. Shipments of medium duty trucks have slowed, and orders for heavy trucks, strong early in the year, have softened.
Construction and Real Estate
Lower interest rates on commercial and residential mortgage loans,
since the peak last March, stimulated an upturn in inquiries and
activity. Interest rates on mortgage loans have since reversed part
of the earlier decline. A number of Chicago-area lenders have raised
quotes on 30-year fixed-rate loans, to around 10 percent in early
September. Rates ranging 9.5-9.75 percent were typical in early
August. A large Chicago-area real estate broker reported an upturn
in unit sales of homes, after declines in the first half.
Nevertheless, homes in some formerly "hot" suburbs remain harder to
sell than a few years ago. Year over-year increases in prices of
homes sold, on average, are reported in single digits after double-
digit rates of rise earlier. Construction activity on downtown
Chicago office buildings continues at a high rate, and industrial
construction in the metropolitan area is strong, as is activity on
public works, especially highways.
Consumer Spending
A contact with a general merchandise retailer expects further
weakness in consumer spending on durables. Sales of women's apparel,
on the other hand, are doing better. Softness in durables was
attributed to slower employment and income growth; weaker home
sales, compared with peaks a few years ago; reduced consumer buying
intentions; and heavy consumer debt levels.
Agriculture
Crop conditions continue to show strong improvement throughout most
of the District, with the August rains being particularly beneficial
for soybeans. Corn crops in Indiana and Wisconsin are excellent,
with 90 percent of the crop rated good or better in early September.
Iowa, although showing some improvement in early September, has only
35 percent of its corn crop rated good or better.