July 18, 1972
Business optimism is growing stronger in the Seventh District, and the view that the economy is in a vigorous expansion seems widespread. It appears to be taken for granted that this expansion will continue at least through the first half of 1973. Firms continue to report they need higher prices because of upward pressures on costs, but they are constrained by the Price Commission and competition. Companies are cautious about adding to payrolls, and most are planning to hold employment stable or to raise it only modestly. The pattern is similar in inventories, with most firms intending to hold inventory increases to moderate amounts. Restraint is less pronounced in the capital spending area, with most companies planning to boost capital spending this year. The demand for commercial and industrial loans is moderately strong.
Increased optimism, evident from conversations with individual businessmen, was the general theme of the speakers at a recent annual Business Outlook Conference which drew attendance from all over the District. The primary difference of opinion among the speakers discussing the overall outlook was with regard to the second half of 1973. For that period, forecasts ranged from incipient recession to continued, even accelerating, growth. Virtually all commentators expected higher interest rates by the end of 1972, particularly short-term rates, and that rates would hold at these higher levels or climb further in 1973.
In specific areas in which detailed forecasts were made, the outlook presented for plant and equipment expenditures was the most optimistic. It was predicted that a capital spending boom was now in its initial stages and would show no significant signs of tapering off until early 1974. Forecasters predicted auto sales for 1972 to be 10.6 million units, and that 1973 would see a slightly higher level, with domestic manufacturers holding on to the gains in market share which have been evident in recent months. The forecast for housing was for a general slowing down, but with starts still exceeding 2 million units this year and only slightly below that level in 1973. Continued but slower growth was forecast for the mobile home market. The outlook presented for retail sales—other than autos—also was strong. However, the expectation was that this strength would be concentrated in durable goods. Nondurables would show little gain except for that resulting from price increases.
The participation of District producers of capital goods in the improvement seems to have broadened in the last month. Increases in sales are beginning to be noted in heavy construction equipment and over-the-road trailers—trends not evident earlier in the year. The one capital goods area reporting no sign of improvement was railroad cars. A local manufacturer reported that if it were not for a small order received in January, they would have closed down everything except repair operations. This firm has not received enough requests for quotations to give them any hope of significant improvement before the last quarter of the year, if then.
Among the various consumer durable products, sales of recreational vehicles at both the retail and manufacturing levels have been very strong. One area manufacturer reported that his company's sales were nearly double last year's, and that shipping facilities to meet promised deliveries were becoming a bottleneck.
Strikes by various crafts have slowed construction in the Chicago area. The elevator constructors' strike was concluded July 9 after 100 days, and short strikes by the masons and carpenters have caused delays on several major projects, with one major building now about three months behind schedule.
Livestock prices continue at exceptionally high levels in response to strong consumer demand. Although meat supplies will be increasing seasonally over the next several months, recent estimates of livestock numbers have caused many observers to expect only modest price declines during the remainder of the year.
Crop conditions generally are reported "excellent" across the Midwest, suggesting a near record fall harvest. Nevertheless, crop prices generally are near their highs for the year. The pending grain agreement with Russia (announced over the weekend) has provided considerable support to the market. Settlement of the dock strike in Japan would provide further support.
Conversations with bankers in this District suggest that the demand for commercial and industrial loans is moderately strong, but there is no indication that an upsurge is developing. Except in Detroit, where demand has been sluggish all spring and remains so, the banks that were reporting the strongest demand earlier have experienced some weakening recently, while the others seem to be doing better. Borrowing over the June tax date generally was less than had been expected, and lack of inventory building is widely mentioned as a source of weakness. Competition for loans appears to be very strong among bankers, and we hear many comments that national customers are staying in the commercial paper market. We have heard a number of comments from banks about the aggressive operations of the largest Chicago banks via "cap" term loans. While loanable funds are still generally adequate, the major Chicago banks added substantially to their outstanding CD's last month, and one bank indicates that it may have to seek CD money much more aggressively if inventory investment is stepped up as expected.