January 10, 1973
The Seventh District economy retains a strong upward momentum. Employment is increasing, retail sales have been extremely vigorous, order backlogs are building, and lead times are stretching out. Inflationary pressures are increasing as indicated by the recent rise in farm prices, higher prices charged by small firms exempt from controls, and requests of utilities and regulated public transport lines for substantial increases in rates and fares. Increases in production are impeded by lack of availability of fuel, skilled labor, parts, and components. The most serious supply problems relate to availability of fuel, both natural gas and heating oil.
Fuel shortages have been reported in all five states of the Seventh District in the past month. Much colder weather this year has increased fuel usage for home heating by 20 percent to 25 percent over last year. Shortages of propane gas are widespread. Utilities have shut off "interruptible" natural gas customers in a number of cases. There have been reports of temporary shutdowns of manufacturing facilities and of apparatus for drying corn and soybeans. Suppliers of heating oil and diesel fuel have stopped taking new customers, and have reduced allotments to established customers. On January 8, the largest supplier of these products in the Midwest announced it was cutting deliveries to established customers to 75 percent of last year's January level. Price controls are blamed, in part, for fuel oil shortages because of an artificially low price for home heating oil and lack of flexibility in prices in wholesale markets. The Midwest is a deficit refining area, and the price mechanism normally allows area oil firms to bid additional supplies away from the Gulf region.
Employment apparently would be increasing faster and output would be rising faster if sufficient numbers of qualified workers were available. Many firms are having difficulty rebuilding work forces reduced during the recession. Affected industries include steel, machine tools, capital goods components, and furniture. Apprenticeship programs are being expanded, but results will take time.
District businessmen do not appear to worry about a second-half slowdown. For example, Milwaukee purchasing managers are said to "show concern, not for the future, but rather for the deterioration of deliveries and quality, and the growing list of shortages of materials and skilled labor".
Steel firms expect a record year in 1973. One large area firm is operating at effective capacity and order books are filling for future months. Recent months have seen a revival of orders for fabricated structural steel, including orders for manufacturing buildings.
Capital expenditures may be heading for a boom as additional firms increase appropriations. Foreign demand also has increased substantially in the past several months. The improvement is broadly based and includes Communist countries.
Among the supplies and components requiring longer lead times currently are electric motors, fluid drives, axles, diesel engines, bearings, castings, forgings, cutting tools, dies, and molds. In several cases the delivery situation deteriorated very rapidly in the final months of 1972. Of course, shortages and delays tend to cumulate as precautionary measures are taken. There are reports of growing imbalance in inventories of supplies.
A number of reports indicate that manufacturers are planning production at levels that will permit them to weather strikes in 1973. Examples are construction machinery, farm machinery, and motor vehicles. Steel firms expect that their orders will reflect these plans.
Housing experts are gradually raising their forecasts for 1973, although most still see a significant decline from 1972 to 2.0-2.1 million units. Demand for used homes is strong, and a large Chicago area real estate firm projects an average rise in prices of existing homes of at least 6 percent this year. Supplies of many building materials are tight. Gypsum board is being substituted for high-priced plywood and fiberboard.
Farm prices continue to strengthen, suggesting a continuance of relatively high farm income, and also higher prices at retail, especially for meat. Both cattle and hog prices rose even more sharply than expected in December, reflecting reduced production and weather-delayed marketings. Wholesale meat prices are now above the peak reached near mid-1972. About 10 percent of the corn and soybean crops remain in the fields, but current reports indicate that losses will be small and much less than had been feared.