August 10, 1973
As seen from the Seventh District, demands for, and output of, virtually all consumer goods, building materials, and business equipment continue to rise or remain at very high levels. The number of housing permits issued in major Midwest centers declined sharply in June, and the downtrend almost certainly continued in July and early August as new mortgage commitments were curtailed. Scattered signs of softness in sales of mobile homes are reported. Sales and output of motor homes and other recreational vehicles have been well below expectations. With these exceptions, the momentum of the uptrend appears to continue unabated. Major new expansion plans have been announced for a number of industries. Labor markets are very tight) especially for skilled and experienced workers. There are widespread shortages, often critical, of materials and components. The frenzied activity and surging prices in the agricultural commodity markets are without precedent and difficult to analyze. Phase IV price regulations are commonly regarded as difficult to understand, as hard to administer, and in some cases as inequitable and "counter-productive".
The recent sharp rise in short-term interest rates to record levels was not foreseen in forecasts offered earlier in the year. Moreover, most experts did not expect high-grade corporate bonds to break through the 8 percent level. Very high rates have caused uneasiness and produced forecasts of recession by some bankers. (Those who emphasize changes in monetary aggregates are less concerned.)
Large net outflows of savings from savings and loan associations in July, compared with large gains last year, began after interest ceilings on savings accounts were raised on July 5. Ironically, some savings and loan association executives regarded the higher ceilings as harmful rather than helpful in preventing deposit drains. Outstanding mortgage loan commitments are very large and probably will support a continued high level of residential construction through the summer. In Illinois, under an 8 percent usury ceiling, new commitments have almost "dried up".
Only scattered effects of high interest rates have been reported on expanding plans for mortgage financing of commercial and industrial projects. Similarly, business borrowers have shown little reluctance to borrow at the higher prime rate, with an effective rate commonly about 10 percent.
Purchasing managers of manufacturers are "beating the bushes" to locate greater quantities of a long list of materials and components in short supply. Steel, nonferrous metals, cement, petroleum products, textiles, and paper, to mention only major areas, are all causing headaches. Various practices have developed that recall "gray market" situations. Equipment output has been held back by the availability of castings, forgings, bearings, motors, electrical controls, and other necessary parts. Some producers have gone to outside suppliers, often at 30 to 40 percent higher cost. Backlogs continue to grow, and lead times continue to lengthen. Escalator clauses of various types are written into longer term contracts. Many sellers refuse to enter into the long-term contracts that had been customary.
A number of industries are moving vigorously to expand basic capacity. Included are electric power, motor vehicles (assembly facilities and parts), chemicals, petroleum, mining (coal and metallic ores), farm tractors, and paper. Basic expansion plans in steel and cement, however, are not under way despite apparent long- term needs. (Incidentally, a new official measure of oil-refining utilization places operations recently at 100 percent, rather than at 95 percent, as indicated by the old series.)
Strength in orders continues for equipment used in agriculture, construction, earth moving, mining, quarrying, railroads, trucking, food processing, electrical generation, and materials handling. Demand for most types of machine tools continues very strong. (Most major airlines, however, have no plans to buy new aircraft.) Foreign demand is excellent, including orders from Russia.
The high figures for retail trade in July did not surprise large retailers headquartered in this region. They have been pleased with results all year. The rise in installment loan delinquencies shown by the ABA series has not been evident in the experience of large chains. Sales of major appliances by distributors to dealers (equated with consumer demand) have surged since mid-June. Freezers and air conditioners have been in the lead, but all major appliances have performed well. Appliance inventories are significantly lower relative to sales than a year ago. Among the worst shortage items in retailing are wood furniture and wool clothing. But relatively tight supply conditions are reflected generally in the absence of heavy promotions and normal price cutting for sale merchandise.
Many informed businessmen now believe that the dollar is undervalued relative to other currencies. Domestic prices of steel, nonferrous metals, petroleum products, chemicals, and agricultural commodities average well below world prices. Moreover, prices of finished goods appear to be rising more rapidly abroad.