April 10, 1974
The capital goods producers in the Seventh District see absolutely no letup in demand. Industries worst hit by slower sales and the oil shortage—large cars, plastics, and recreation-related activities—appear to have bottomed out with some improvement noted. The feared "secondary" impacts of the energy crisis have not been clearly significant. General shortages of skilled labor, materials, and components continue. Prices of components and finished goods are moving up even more rapidly as controls are relaxed. Forecasts for the general economy by regional experts were being revised upward recently, but the renewed upsurge in interest rates has raised new doubts, particularly for on-site housing. Prospects for large farm crops are good, but there is concern over shortages of machinery, transportation, and fertilizer.
Large firms will be raising prices in the next few months as circumstances permit, but even industries that have been "freed" of controls realize that caution is necessary. Chicago daily newspapers were raised from 10 to 15 cents on April 1, apparently without repercussions, which may reflect the public's acceptance of inflation as a continuing trend.
Declines in demand for such products as autos, some appliances, and TV sets have not eased supplies, except for components used in consumer electronics. Shortages mentioned most frequently include steel, nonferrous metals, petroleum-based products, and paper. Inventories are rising, but they are badly unbalanced. "You take what you can get and wait for the rest." Purchasers complain of vendors disregarding terms of contracts and that "business ethics are on the block to the highest bidders." Strikes, e.g., in transportation, coal mines, truck wheels, and outboard motor components, have contributed to problems. Firm shipping dates and firm prices are becoming the exception rather than the rule.
Freight car availability is the "worst in all railroad history." Freight car builders are booked through the first quarter of 1975, but production has been hampered by a strike at the major factory producing wheels. Shippers in Michigan are worried about proposed abandonment of railroad trackage, which is now heavily used. Pressure on capacity of truckers has been increased by reduced speeds and by problems of independent truckers (who handle over one-third of highway freight) in getting adequate fuel at prices they can afford.
Gasoline has become generally available in the past several weeks in the Chicago area, which had much the worst problem in the District. Many smaller cities were never seriously inconvenienced. Local experts believe the world price for crude oil will "settle" at about $10 per barrel, which might be compatible with a U. S. retail gasoline price of 63-65 cents.
Some users of steel have been told that their allocations will be reduced in the next few months because of the coal strike of early March and other problems holding back steel output—availability of scrap, ore pellets, and fuel. A shipbuilder has been unable to bid on contracts because he cannot get commitments on steel.
Because lead times continue to lengthen on new capital goods, some firms that normally buy only new equipment are purchasing used equipment. Demand for capital goods is very strong "for all products, and in all foreign countries, including the U. K." Down payments are now required on some products, on which such payments were not required before, with no effect on demand. A large construction equipment producer, who recently shifted pricing to time of delivery instead of time of order, would be "happy if our order backlog were half as large." There is "no way" the farm equipment industry can increase sales over last year because output is at capacity and finished goods inventories are down sharply.
Shortages of skilled labor, including machinists, welders, mining technicians, and electronics engineers, etc., are said to be "the worst ever." In contrast, the market for teachers is weak and will weaken further as school enrollments continue to decline. A Chicago teacher is being aided by the ACLU in a suit against compulsory retirement at 65, the outcome of which may have a widespread impact on employment practices. Michigan observers believe many laid-off auto workers will never be rehired. In the past, the industry has used such layoff periods to revamp operations so fewer workers are employed.