July 15, 1970
Businessmen and economists in the Seventh District appear to accept the view that the decline in real GNP has about ended, but most anticipate an extended plateau at current levels of activity. Labor markets are generally weaker, and producers of capital goods components report a softening of tone in incoming orders. However, no significant production declines are expected. Business sentiment is described as "languid," and several businessmen have pointed out that, "it has been a long time since there has been any really good news."
There are few indications of price shading. A major farm equipment manufacturer indicates that there is some price softness at the retail level. It is reported that large lot purchases of home appliances, carpets, etc., by housing developers have been at lower prices, but a representative from the home laundry appliance industry contends that there has not been any shading of prices even on large lot sales. Our directors from manufacturing industries report that almost all suppliers are posting higher prices and that, "materials prices are going through the roof." A major motorcycle manufacturer is quoting new model prices consistent with an expected five percent annual rate of increase in materials prices and doubts that this will be enough to cover the actual increase.
The settlement of the truck strike has not added perceptibly to optimism in Chicago. The large size of the contract settlement is disturbing to many. Concern with the possibility of an auto strike remains but it is mentioned less frequently in discussions since no one has anything new to add.
A major construction equipment producer reports that it has stopped all hiring. Retirements and quits are not being replaced. A capital goods components producer indicates that it is considering alternative layoff schemes.
There is now a clear indication that the export market for steel will weaken, according to a major midwestern steel company. Prices in Europe are falling and are likely to continue to decline. During the first half of this year, steel exports offset declines in domestic shipments, primarily to the auto industry. If there are no labor difficulties in the auto industry, it is now expected that increased steel demand for autos will offset the softening in export sales and some weakness in capital goods. So far, steel orders have tended to weaken, but no more than would be expected during an auto changeover period.
Since May, auto production has been running above year ago levels. The trend is encouraging to many. Truck sales have been looking better with one major manufacturer indicating that the lighter trucks, or those on the lower end of the price range, are selling the best. Several industry representatives are now arguing that it is the sluggishness of the economy rather than the truck strikes that has been the major factor in a less buoyant sales picture for large trucks.
Domestic air traffic in June was below last year, and the second quarter as a whole was very poor. But international air travel has held up well since foreign travel decisions were largely made prior to the first half decline in the economy. Foreign travel is thus expected to be down next year.
Cost cutting programs are still in force. Advertising outlays are being cut back sharply. A firm that does engravings for large national advertisers reports the slowest order pattern since 1961.
Estimates of corporate earnings are still declining. A number of companies are reporting sharp drops in profits from European operations. Second quarter earnings of major airlines were up from the first quarter, but still very poor as compared with last year.
Loan demand is still reported strong by district banks and is being bolstered by the shift out of commercial paper. Several finance industry spokesmen argue that there has been much misinformation about commercial paper—in particular, the failure of many to understand the short maturity of the paper and to realize that the paper is not always fully covered by bank lines.
Savings flows into banks are better than last year. No net outflows posted.
A major capital goods components manufacturer reports that its 3-5 year investment planning decisions assume no significant decrease in money costs. Most banks and businessmen continue to talk about the prospect of heavy credit demands from corporations, municipalities and states, and the federal government. The "illiquidity" of banks and nonfinancial firms is mentioned frequently.