In the past month or so the gap between the most optimistic and the most pessimistic forecasts of total activity for 1971 in this district have tended to narrow, moving toward a middle ground. Prospects for either a second slide-off in activity or a vigorous upsurge appear to have faded. Continuance of the gradual uptrend, dampened by the steel inventory reduction after August 1, is now the general expectation.
Also in recent weeks, sentiment has jelled more firmly in the view that price inflation is not subsiding significantly, and indeed, may accelerate. Inflation psychology is credited with a role in the strengthening of long-term interest rates, which are supposed to incorporate an allowance for the potential reduction in the purchasing power of the dollar.
Reports of purchasing agents in the Chicago area in recent months have indicated a continued moderate rise in orders, shipments, and inventories. Order backlogs have stopped declining, but no building is evident. Profit margins are believed to have continued to deteriorate on average through May. Employment continues to edge down for these firms on average. Increases in prices paid to suppliers are almost as common as a year ago, while decreases are rare. This general picture also is reported by certain small companies that have been good pacesetters for general activity in the past.
The improvement in business activity largely reflects developments in consumer goods and residential construction. In the case of motor trucks, sales of light trucks (often really family vehicles) are much stronger than sales of heavy trucks. Demand for farm machinery picked up in the late spring from a very low base. Among the consumer goods for which business has improved in recent months are floor coverings, furniture, and some types of appliances, large and small.
A 142-day strike ended in mid-June at plants of a major laundry appliance producer. A major construction machinery producer was shut down because of a strike at a vital parts plant.
Output of "raw steel" declined in the first half of June. Mill shipments doubtless will be lower in July than in June, contrary to earlier expectations. Many steel customers are said to have hedged their requirements less fully than in prior pre-strike periods. This may reflect both the belief that no long strike will develop, and the fact that steel "chew-up" has failed to meet expectations. Steel order books for the August-September period are virtually empty.
Producers of business equipment now are highly receptive to proposals for a more open trade policy with Iron Curtain countries, even though this means exporting technology in the form of whole plants and systems.
Current reports on auto sales are difficult to evaluate.
Ten-day
delivery reports are strongly influenced by the timing of incentives
and other special factors. Production for June is scheduled at a
high 800,000 units, but some plants have been shut down for
inventory adjustments, and closedowns for model changeovers will
begin shortly.
Residential construction, of course, is booming with permits in the Chicago area double last year's level in recent months. Record construction of housing for the second half of 1971 seems assured, on the basis of existing financial commitments. Doubts for 1972 are increasing, however, partly because of the uptrend in interest rates, and partly because of vacancy rates in some apartment areas. Breakthroughs in modular construction of housing (union relations, etc.) are believed to be at hand.
Grain prices have increased sharply in the past two weeks because of the growing corn blight scare. Planted corn acreage is up at least 6 percent, but the blight has now been identified, in a variety of forms, in all district states—including the Illinois, Indiana, Iowa Corn Belt. Clear indication of significant damage is still lacking, but some grain traders are gambling on a heavy crop loss.
Business loan demand is increasing more than had been expected a few weeks ago. Some bankers view the recent trend in loans as a return to a more typical seasonal pattern. Banks are more aggressive in seeking CD money, partly because of an anticipated further rise in loans, but also because of a slower inflow of funds to passbook and consumer certificate accounts. Virtually all major banks now expect stable, or higher, long-term interest rates. Continued heavy total demand for funds, growth in the monetary aggregates, and continued price inflation are offered as reasons for this view.