February 9, 1972
For the most part economic sentiment in the Seventh District continues to lack exuberance, but total activity probably is rising moderately, and some firms producing consumer durables and capital goods are very pleased with the recent trend of their orders. Job markets continue slack and local labor offices foresee only seasonal changes in employment in the first quarter. Liquidity of consumers, business firms, and lending institutions has improved substantially in the past year. Increasingly, the credit sectors have become "buyers' markets."
Demand for consumer household durables—virtually all major appliances, furniture, and television (especially color)—has been vigorous in recent months. Producers expect further gains in 1972, and are encouraging inventory building by dealers and distributors. We are unable to reconcile heavy factory orders and shipments with the modest increase in retail sales shown for the furniture and appliance stores in the department of commerce report.
GM recently announced another increase in employment at auto assembly plants (the third in about two months). But other auto producers have cut production schedules for some models because of high inventories. The realignment of currencies, together with rising costs abroad, have about eliminated the price advantage of imports, despite the end of the surcharge. Plans are underway to increase domestic procurement of components for subcompacts. Production of small cars directly competitive with foreign subcompacts is being pushed to capacity, but labor unrest is threatening current output schedules. Styling changes have been deferred for U.S. full-sized cars, apparently because of attempts to conform to safety and pollution standards.
Demand for heavy trucks (gross vehicle weight of 26,000 pounds or more) for highway transport and construction work is extremely strong. Producers of major components, including engines and rear axles, are operating at capacity. Demand for highway trailers also has increased. Gains in highway traffic volume, higher profits, and larger total cash flow for trucking firms are expected to maintain demand for transport vehicles for many months.
Other capital goods sectors show signs of revival. Orders for capital goods components improved markedly in the fourth quarter and have continued strong thus far in 1972. Some tool and die shops, and some producers of machine tools, are reporting modest improvement in orders from very depressed levels. Demand for construction machinery from domestic customers is fairly good. Foreign demand for virtually all exported capital goods nose-dived about mid-1971 and has not recovered.
Orders for steel have increased as expected and Chicago area producers are pleased with recent trends. One large mill is now operating at "normal" levels. Auto companies are buying steel again, partly because excess inventories have been exhausted, but also because of price concessions. Demand for steel plates has increased, and a substantial backlog exists for fabricated structural steel for large buildings. Producers of household appliances are now buying steel at a good rate. Steel requirements for facilities for the oil and chemical industries have exceeded expectations. The anticipated rise in demand for railroad equipment, however, has not yet materialized.
Although total manufacturing employment in the District appears to have stabilized, announcements of plant closings continue, especially in the Detroit and Milwaukee areas. Multi-plant companies are consolidating operations in fewer locations in an effort to cut costs. Also, there is a strong tendency to locate new facilities in the South (or abroad) to benefit from lower taxes, lower labor rates, and a more docile (more "cooperative") labor force. In some cases, labor unions are showing greater willingness to negotiate problems.
Prospects remain good for a high level of housing starts in the District in 1972. But concern is growing over problems in the FHA subsidization programs. Some large new office buildings have been announced recently for the Chicago Loop, in the face of a reported large overhang of unrented space, in existence and under construction.
The meat-producing rural areas of the District have been cheered by high prices for cattle and hogs. Recently, prices of meat animals have edged down, however. Larger numbers of cattle on feed are expected to increase marketings and lower cattle prices somewhat further. Cutbacks in hog production are likely to moderate further declines in hog prices. Farmland values increased about 4 percent in 1971, and a growing number of bankers expect further increases in 1972.
District banks—large and small, city and rural—have an ample supply of funds and are actively seeking loans. Business loan demand is reported to be very weak with more than seasonal declines in outstandings underway. Savings inflows continue very strong, both at banks and S&Ls. Except for Detroit (where pass book rates were cut to 4 percent in 1971), savings rates offered by large banks remain at the ceiling. Many rural bankers would like to have Regulation Q ceilings reduced, but large city banks fear S&L competition. A prominent Chicago bank executive stated recently that no cuts in savings rates are planned for the near future, and his bank probably would have to lead the parade. Negotiable CD money is not actively sought, especially with maturities of less than six months. Many comments relate to the "cost-squeeze" on banks resulting from continued high costs of money, and high expenses generally, in the face of lower market rates. Attempts are being made to hold down employment and other operating costs.