December 6, 1989
Summary
Several reports indicate softening in manufacturing, centered
predominantly on motor vehicles but also including some types of
electronic equipment and nonauto consumer durables. Other
respondents with manufacturers see continued expansion in line with
the pace set earlier this year, generally a more subdued rate of
rise than last year's robust increases. Construction in the District
continues relatively strong though Michigan is weakening. Consumer
spending on nondurables is not showing the weakness evident in
durables. General merchandise sales are expected to grow sluggishly
over the year ahead. District farmland values continue to increase.
Large grain shipments to the USSR are stressing domestic
transportation facilities.
Total payroll employment in District states has been little changed, seasonally adjusted, since early this year and manufacturing has fallen, with half of the decline at Michigan factories. The average unemployment rate in the District rose to 6.1 percent in September, highest this year, from a low of 5.0 percent in April. Michigan unemployment increased most among District states, but Illinois, Indiana, and Iowa also recorded sizable increases.
Surveys of purchasing managers in the District show a mixed pattern. Chicago purchasing managers reported an upturn in production and orders in October and less widespread declines in backlogs. Indianapolis purchasing managers, still seeing expansion, indicated that increases in production and orders in October were more widespread than last summer but less so than a year ago. Milwaukee purchasers say orders, production, and backlogs fell in October, continuing a shift from expansion to slowdown underway for more than a year.
Manufacturing Industries
A number of contacts in manufacturing indicate that orders and
activity are continuing to rise, in most cases less rapidly than
last year. Others report declines, concentrated at motor vehicle
makers and their suppliers, though volume also has turned down or is
expected to slow in a few other sectors including nonauto consumer
durables and some types of electronics. However, other motor vehicle
plants continue to work overtime, and another foreign-owned assembly
plant started production in the District in October. One major auto
maker is forecasting a recession for the national economy; another
thinks this projection is too pessimistic.
Markets for many types of industrial machinery and equipment have continued to expand, though generally more slowly than last year. In some cases, sales have been stronger than expected. Sales have remained 3 to 4 percent above a year earlier throughout this year for a maker of electrical controls and supplies sold widely to manufacturers of industrial equipment including pumps, compressors, fans, motors, and other types of capital goods. A second-half slowdown anticipated by customers earlier this year has not materialized; sales remain as brisk as before. Another capital goods producer indicated that sales of food industry machinery are holding up reasonably well. Materials handling equipment sales weakened earlier but may be bottoming. Sales of farm tractors and implements are running well ahead of last year, and a manufacturer in the District expects a further gain in shipments next year to meet retail demand and build inventories. Heavy construction equipment demand has been firmer for road building and mining. Light construction equipment sales, chiefly for residential building as well as some road repair work, were reported weaker earlier this year, but one producer expects its sales in 1989 to exceed last year, and projects a further gain in 1990. Lower orders for metal- cutting machine tools this year are said mainly to reflect cutbacks by motor vehicle makers. The market for diesel engines is off sharply because of lower orders and production cuts at heavy truck manufacturers and a less robust picture for industrial diesels. Softness in the semiconductor market reflects cutbacks at motor vehicle manufacturers and less favorable prospects for other end- markets.
Steel producers also are cutting shipments to motor vehicle manufacturers, but industrial and construction demands for steel are holding up well. Calendar-year 1989 shipments, previously forecast to be below 1988. are now expected to be higher. The pace of investment in projects making heavy use of steel has stayed strong in chemicals and the paper industry, as well as for investment in steel mills themselves. Sales of steel for use in commercial construction are also described as doing well. Starts on new projects have slowed, but may pick up as uncertainties over pollution abatement requirements are resolved.
Construction and Real Estate
Indicators of construction activity and prospects remain favorable
in much of the District. Contracts for construction of
nonresidential and residential buildings were higher, during this
year's first nine months, than last year in the District states.
Michigan, however, showed sizable declines. Indicators of current
construction activity also indicate expansion. For example, year-to-
date shipments of gypsum board to the five District states were 6
percent higher than a year earlier. A large Chicago-area building
material supplier views prospects for downtown and suburban
construction as favorable for the next four to five years, and plans
to add capacity. Light industrial construction in the Chicago area
is quite active. Residential building is down, but still at a "good"
level. Existing home sales are sluggish, despite lower mortgage
interest rates. The inventory of homes on the market has risen, and
they are taking longer to sell.
Consumer Spending
A contact with a large general merchandise retailer thinks nonauto
consumer spending is unlikely to provide much support for continued
economic expansion in the year ahead. Sales of household durables
generally have been weak. Home fashions have been selling poorly.
Though appliance sales have improved recently at one large retailer,
year-to-date sales of "core" appliances have been below last year.
Buying of household furniture and lawn care equipment have softened.
Some apparel lines have been selling relatively well, including
men's and children's clothing. Industry-wide department store
inventories are viewed as heavy, indicating that a highly
promotional Christmas is likely. Next year's sales at general
merchandise retailers are expected to be only a little higher than
in 1989. Catalog and direct mail marketers' sales were described as
soft in September and October.
Agriculture
Our latest survey of agricultural banks found that District farmland
values rose 1.7 percent during the third quarter and 8 percent
during the year ending September 30. The survey also indicated that
farm loan repayment rates picked up somewhat this summer. Interest
rates charged by banks on farm loans edged lower for the second
consecutive quarter but were still 50 basis points higher than a
year ago. Loan-to-deposit ratios at District agricultural banks,
following a two-year uptrend, are at a five-year high but still far
below the peak in the late 1970s.
Barge rates and the demand for rail cars have firmed considerably this fall in response to large grain shipments to the USSR. While not unprecedented, the volume of Soviet grain shipments will stress the domestic transportation network. A major bottleneck at the soon- to-be-replaced Alton (Illinois) Lock and Dam on the Mississippi River has resurfaced with the pick-up in barge traffic. Low water levels on both the Mississippi and the Missouri River could further limit barge traffic or result in an early, season-ending closure to traffic on the upper portions of those rivers.