March 9, 1971
The $1065 billion GNP "goal" for 1971, announced by the CEA a month ago, has been regarded with skepticism by observers in this District. The consensus appears to continue to center on $1050 billion. Nevertheless, the controversy appears to have an impact on psychology. The high figure for GNP, coupled with pressures for a more expansive monetary policy from various sectors (including Administration circles), is commonly taken to mean that "the government" is determined to get spending rising rapidly, even at the risk of a renewed acceleration of price inflation.
Demand for workers of all degrees of skill and experience remains very slow. Unemployment compensation claims in February continued to run well above last year's levels in all areas of the District, except Michigan, where cutbacks in auto production schedules were underway a year ago.
Strikes are hampering output in many industries, although the overall impact is much less than during the GM dispute. At last reports, labor disputes had closed a laundry appliance manufacturer in Iowa, a machine tool producer in Illinois, an auto assembly plant in Wisconsin, and ready-mix concrete facilities in Indianapolis. Labor militancy is causing many employers to offer large increases in compensation in initial stages of negotiations, despite an ample supply of potential workers.
Evidence available in this District does not support Rinfret's recent statement that total capital expenditures by business firms will rise 11 percent in 1971. Orders for both capital goods components and finished equipment remain slow. In the case of machine tools and steel mill equipment, the situation is extremely depressed. There is no prospect for an early recovery for commercial or manufacturing construction activity. The airlines are reducing or postponing acquisitions of new equipment wherever possible. Railroads and truckers would like to buy new equipment, but their financial resources are limited. However, capital outlays of utilities will be very strong and the petroleum industry expects to spend about 8 percent more in 1971.
Demand for steel is at a very high level, but it is impossible to determine what share of current demand represents a desire to build inventories for strike protection. Orders are also stimulated by a desire to anticipate price increases in mid-April and on June 1, when price moratoriums expire. A Chicago steel producer describes current orders as "fantastic," with no recent slackening from the high January level, as reported by some Eastern mills. This firm's order backlog is well above the backlog of the similar period of 1968.
Some observers of auto industry trends are puzzled by the apparent discrepancy between the 1 percent decline from a year earlier in retail sales of the automotive group in the January 1-February 20 period, as published by the Bureau of the Census, and the 13-percent increase in dealer deliveries of passenger cars (at higher prices), reported by the auto manufacturers. We are told that some GM dealers are falsely claiming that some of the new cars they order are already sold, in order to profit from contest incentives. Also, the average size of car is less than a year ago. These factors appear insufficient, however, to explain the apparent discrepancy between retail sales and deliveries.
Some capital expenditures by auto firms are being postponed indefinitely, awaiting firm decisions on the standards to be adopted to curb pollution.
Residential construction activity will rise sharply in this District in the spring season. Men and materials are available in ample quantity. Multi-family units will be especially strong. Unfortunately, the program to build modular units in the City of Chicago, started in 1968, has "flopped," according to a recent evaluation, with only a few units completed and no prospects for a revival. There is a push to rehabilitate low-income housing in the large cities, some of which had been rehabilitated only a few years ago. Business of title firms has been 10 to 30 percent higher than a year earlier in recent months.
The continued heavy calendar of new corporate security issues continues to surprise informed individuals. Short-term rates continue to decline, but there is no consensus on the trend of long- term rates. Business loan demand at commercial banks is said to be "about seasonal." New commitments have increased, but lines are not being taken down as rapidly. Large banks are offering to make term loans more readily—up to seven years in maturity—but usually want to include interest rate escalators. Business firms usually prefer fixed rates, so the bargaining continues.