July 21, 1971
Observers in the Seventh District report the rebound from the
economy's low point as slower and less vigorous than anticipated.
Confidence remains, however, that an uptrend is under way and that
the fourth quarter and early 1972 will see marked gains in real
growth and activity. Price expectations are bearish, however. Little
indication is seen of slowing in the rate of price advance and some
expect acceleration toward yearend.
The business economists present at the regular monthly meeting held
here on July 14 continue to expect improvement in activity during
coming months, particularly toward yearend and into 1972. Thus far,
however, the economy's performance has lagged behind the pace
expected earlier. The inflow of new orders has been sluggish-utility
business and orders for pollution-control devices are exceptions-and
profits have been under pressure; cost-cutting efforts continue to
be pushed vigorously. Steel is in the doldrums. Scattered layoffs
have occurred in advance of the strike deadline date. Users'
inventory reductions are proceeding; Detroit's largest user is
expected to complete its steel inventory rundown by mid-November.
Fixed investment outlays are being held down to a replacement level
(the utilities industry was not represented at the meeting).
Representatives of the large loop banks reported early signs of a
pickup in business loan demand. Inquiries on the availability of
term loans and revolving credit arrangements have grown more
numerous, but lending volume has not yet strengthened. Savings
inflows are down from earlier in 1971. Runoffs in large certificates
of deposit have been increasing recently.
The major retail chains report a sharp pickup in sales during June,
with gains over the year-earlier month in the 9-12 per cent range
for three of the leading firms. Another bright spot, locally, is
real estate, with a volume of sales recently of boom proportions.
Several of those present expressed dismay over price prospects.
Confidence that the inflationary thrust would weaken later this year
seemed to have dissipated altogether (the second quarter GNP and
deflator readings had not yet been released).
A director of the bank who is closely identified with real estate
confirms the indications of continued strength in both sales of new
and existing homes and home-building activity in the Chicago area,
while viewing with much concern the implications of FHA's adherence
to the present 7 per cent ceiling on contract rates. Loan discounts
running from 7 to as many as 10 points are substantially raising,
sometimes even doubling, developers' equities in new income
properties (commercial buildings and multi-family housing). This
could become a strong deterrent to construction in a market that
already has shown signs of tapering off, under the impact of some
softening in occupancy rates in office space, high-rise luxury
apartments, and suburban walk-up apartments.
Farmland values in many parts of the Seventh District have
strengthened from a year ago-particularly during the past three
months. Overall average values for the District, according to a July
1 survey of rural bankers, rose more than 2 per cent from first
quarter levels and were about 3 per cent above year-ago levels.
Although the year-to-year increase is small historically, it
represents a marked recovery from the sluggish farmland market of
1970. Greater availability of mortgage funds and accompanying lower
interest rates have likely boosted demand for farmland. High corn
and soybean prices have also likely created buying enthusiasm.
Corn acreage is up substantially from last year, according to the
official July 1 crop report. Acreage to be harvested for grain was
estimated at 64.5 million acres -12 per cent above a year ago and
over 6 per cent larger than in the bumper crop year of 1967, when
60. 5 million acres were harvested.
Leaf blight disease has been discovered in varying degrees
throughout most corn-producing states. But, unlike last year when
virtually all of the crop was susceptible to the disease, nearly 30
per cent of this year's crop was planted with blight-resistant seed.
Another 30 per cent was planted with varying blends of resistant and
susceptible seed. Thus, between 30 and 45 per cent of the crop is
resistant to blight.
A precipitous drop in cash prices for corn does not appear imminent
due to the current low level of corn supplies-carryover stocks are
expected to be one-third smaller this fall-and uncertainty about the
final size of this year's crop. If present production prospects
become a reality, however, corn prices will be substantially below
current levels by late 1971.
Conversations with contacts at major commercial banks in Chicago did
not reveal any significant change in credit demands over the past
month. Business loans appear to be still falling somewhat short of
projections based on normal seasonal patterns, but by less than a
few months ago. No further increase in the prime rate appears to be
expected until possibly well into next year. There was a general
pessimism about the pace of economic recovery, but part of this
appeared to be a reaction to the recently published second quarter
GNP figures and revisions for earlier periods.
Concern was again expressed about what has happened to savings
inflows, especially in passbooks. One large bank thinks some
disintermediation is again taking place, but is puzzled over where
the funds are going. They have lifted all restrictions on terms
offered on consumer deposits (within ceiling requirements) and are
aggressively trying to compete for consumer funds.