June 13, 1973
The strong uptrend in employment, output, factory orders, retail sales, personal income, and profits continues in the Seventh District. Demand for apartments has slowed, however, and the expected decline in residential construction is clearly underway. The well publicized decision of a mayor producer of recreational motor homes to cut output sharply because of excessive inventories stands out as an isolated example. Most manufacturers are concentrating on maintenance of high level production schedules, with due concern for quality, in the face of shortages of materials and manpower. Prospects for large crops are now excellent, following earlier fears that wet fields would cut yields.
Higher short-term interest rates and reduced availability of mortgage credit have caused some apprehension that credit conditions will tighten generally in the remainder of the year. The adverse psychological factors—Watergate, inflation, international pressures on the dollar, and the failure of the stock market to rebound—are widely commented upon, but there is no solid evidence that either planned consumer purchases or planned business investments have been curtailed as a result. Newspapers have publicized views of Chicago forecasters that a general recession, or a marked slowdown in growth may occur late in 1973 or early in 1974, but, again, there is no clear evidence that these reports have affected planning.
Possible anti-inflation moves by the Administration, of course, are a subject of general interest. In June, there has been an acceleration in the number of announcements of price increases for a variety of products and services, including petroleum products, chemicals, motor vehicles, tires, nonferrous metals, and utility rates. This may reflect, in part, fears of either a price freeze or tougher Phase IV controls. Some union contracts have been negotiated at the 5.5-6.0 percent guideline level, but others, including the building trades, are valued at 8 percent or more.
The uptrend in manufacturers’ orders may be slowing because of a reluctance to take on new orders for delivery many months ahead at firm prices. This factor is present in steel, capital goods, nonferrous metals, textiles, paper, petroleum, and chemicals.
The heat wave of the past several days (with heavy demands for air conditioning) caused major utilities in Michigan and Illinois to lower voltages, reduce sales to industrial customers, and call upon other companies for help. Margins of power capacity are lower than desired at peak loads. Utility executives insist that the situation would be extremely critical if Nader is successful in shutting down nuclear power stations.
Gasoline shortages are continually in the news. Most major companies have strict allocation on sales to dealers, and independent distributors are cutting operations. More stations are limiting purchases and are reducing hours of operation to the point that motorists are warned against long journeys at night. Municipalities that usually obtain supplies on contracts covering a year or more have trouble getting bids.
Despite all efforts at publicity by major oil companies, there is a widespread view that the fuel shortage is artificial and is based on a conspiracy. The gasoline situation is especially severe in the Midwest where refineries are largely dependent on domestic crude oil production which has been declining in volume for the past year.
The flurry of interest in the Treasury's proposed tax shelter reforms that relate to construction has largely disappeared. Many builders and real estate financiers never heard of these proposals. For those who were concerned, Representative Mills’ statement in early June was taken to mean that no impact would be felt this year. It is doubtful that tax reform proposals would influence real estate activity before the reform became law. Even if the Treasury's proposals were enacted, many limited partnerships to finance speculative building would still be arranged because of the apparent profitability of such arrangements. Many investors with $5,000 to $100,000 to invest have become disillusioned with the stock market and find real estate attractive, especially with prospects for further inflation of land values and construction costs. Of greater concern to real estate people than tax reform are (1) overbuilding of apartments in some areas, (2) the possibility of significantly tighter credit, and (3) the difficulty of getting new projects approved in the face of environmentalist pressures.
Sharp advances in farm prices and in wholesale prices of processed foods, together with the current structure of future prices, portend further increases in retail food prices. Recent prices paid for livestock at the farm level in some cases have exceeded implied ceilings. A growing number of experts in this region believe the rise in food prices for 1973 as a whole will exceed the revised government estimate of 10 percent.
Country elevators are encountering increased difficulties in obtaining adequate financing. Sizable margin calls on hedged grain and transportation shortages further sharply raised operating capital requirements. The situation is likely to worsen as harvest seasons begin.