April 12, 1972
The business uptrend appears to be gathering momentum in the Seventh District. Psychology and attitudes have improved markedly in recent months, as uncertainties have diminished. Moderate increases in employment are reported from most areas, and further gains are expected in the months ahead. A trend toward inventory building on a broad front is underway. Manufacturers' order-backlogs have increased and lead times are lengthening. Strength in residential construction has been maintained, and capital expenditure plans are being increased. Farm income prospects are favorable. Despite some recent pickup in loan demand, lenders are willing and able to expand credits substantially further. Upward price pressures are evident in raw materials such as nonferrous metals, steel, hides, and lumber.
The steel industry has led the rest of the economy in the past month or two. The pickup in orders and production in the Chicago area has been somewhat stronger than in the nation, with cold-rolled sheets doing especially well. Order lead times for steel have lengthened and discounts from list prices have largely disappeared.
The Detroit auto firms apparently are not unhappy with the relatively large inventories of cars, and they expect a good second quarter, perhaps bettering the advanced March pace. Sales of trucks have been phenomenal. A strike at a District plant that produces about half of the heavy truck engines has continued for five weeks, and is holding back heavy truck assemblies.
Orders for capital goods have been improving in recent months. Even machine tool builders are experiencing a rise in orders and inquiries, but from a very low base.
Defense orders are coming through again for producers that were hit very hard in the cutbacks of recent years. Defense is a relatively small factor in the Seventh District, but a reversal of the decline in procurement will be beneficial to some areas.
Layoffs have been fewer in recent months, and many firms are hiring again selectively after a long drought. Job prospects for college graduates with engineering or business training are better for the first time in three years. But the market for liberal-arts types remains weak. Skilled white- and blue-collar workers, including supervisory types, are in demand again, but the unskilled and inexperienced remain at a disadvantage. Want-ad volume has increased moderately, and executive recruitment agencies report more requests for their services.
Crop preparation activities are proceeding normally in the District despite cold, wet weather. In contrast to the situation in the Southwest and on the Great Plains, moisture conditions are adequate here. Recent price increases for corn and soybeans (associated with speculation surrounding the visit of Butz to Moscow) could increase planting intentions of District farmers, especially for soybeans.
A majority of large District banks have reported some increase in business loan demand in recent weeks, but they do not expect this trend to accelerate substantially through the remainder of 1972. Funds generated from higher profits and depreciation, together with funds obtained from the capital and commercial paper markets, are expected to hold down demand for bank loans even if the rise in business activity matches optimistic projections. Some bank executives describe their loan deposit ratios as "too low," although these ratios are quite high by the standards of ten years ago. In order to compete with the capital market, some banks are offering five-to seven-year credit at 1 per cent over the prime rate, with no compensating balances required. There is an undercurrent of apprehension concerning speculation (with the use of credit) in the stock market. A large number of new equity issues of doubtful quality are being offered, as was the case in earlier periods of stock market strength. Moreover, it is said that "bonds have no friends," partly because inflation fears cause many investors to shun long-term bonds.