April 9, 1975
Although general business activity continues to decline in the Seventh District, there are signs that the rate of decline is slowing. Job and product markets are much more competitive and prices of various industrial products have declined. A heavy snowfall on April 2 disrupted transportation and output in Chicago and southern Michigan for a day or so. Output schedules for autos, appliances, and some other consumer goods have been raised moderately and tentatively from very depressed levels, mainly because rapid inventory liquidations resulted in stockouts of certain products. Weakness in capital goods is spreading. The farm sector remains relatively strong. Residential construction appears to be heading for a modest revival. Most analysts project some growth in real GNP in the third quarter, helped by slower inflation, inventory reductions, and more stimulative monetary and fiscal policy. Most "monetarists," however, see "the turn" delayed for at least one or two additional quarters. Many businessmen and lenders are concerned that steps to bolster activity will accelerate the inflation rate later this year or next year.
Output of autos, trucks, appliances (both large and small), and some materials and components is scheduled to rise moderately in the next month or two, less because of stronger demand than because of inventory reductions that left some gaps. Producers of certain products, for example, fasteners, small metal parts, and certain home furnishing materials, report very spotty demand with improvement in some areas, while others are severely depressed. Demand for some construction equipment associated with home building, very weak last year, has increased in some cases.
Despite scattered improvements, virtually all industries are operating at reduced levels, most far below capacity, with no sign of an early reversal. Steel mills, which continued to operate at effective capacity throughout 1974, began to cut workweeks and lay off workers in March.
Last year's severe shortages are only a fading memory except for natural gas, fertilizer, and a few special items, mainly components for heavy capital equipment. Lead times have been reduced sharply, deliveries are more dependable, and complaints of poor quality are less frequent. Products such as metal fasteners, paper, motors, and electronic components, which often sold at premiums last year, are now discounted—heavily in some cases. Certain bolts that brought $35 per thousand last summer are now readily available at $8.50. Market prices of some electronic components were cut in half in the first quarter.
Much price cutting takes the form of negotiated discounts or changes in terms of trade, with list prices unchanged. Such adjustments are said to be more prevalent than in the past because of fears that price controls will be reinstated. Manufacturers and large retailers are "putting a squeeze" on suppliers. Price escalators have largely disappeared and prices for future delivery are being quoted on a firm basis for longer periods. However, in many sectors higher prices are likely to hold. Prices of many types of components and finished equipment are 15 to 25 percent or more higher than a year ago. An insurance company reports that its price index on auto parts is up 40 percent from a year ago.
Strength in capital goods, which sustained many District centers through 1974, is ebbing rapidly. Demand for equipment for mining, off-shore drilling, petro-chemicals, and pollution control is still very strong. Markets for farm equipment will be more competitive because producers are rapidly rebuilding badly depleted inventories. Output of railroad equipment continues at a high level, but many freight cars are in storage. Only open hopper cars are now in short supply. Builders of large vessels for the Great Lakes, although operating at high rates, say order backlogs are disappearing. Oil companies say that the end of depletion and changes in tax treatment of foreign earnings will reduce exploration budgets. Producers of various capital goods report cancellations of orders as well as postponements and stretchouts. Reduced demand for products and reduced cash flow are cited as reasons. A producer of construction and materials handling equipment says, however, that the "explosive" rate of order cancellations that started late last year has moderated. Producers of components for equipment report that the decline in orders, very sharp in late 1974 and early 1975, has leveled off—even reversed in some cases. A number of companies say that European orders have held up better than domestic business. Some believe that the dollar is now substantially undervalued relative to various other currencies. There is no evidence that the increase in the investment tax credit (to 10 percent) has affected sales of equipment.
The decline in employment and the rise of unemployment continues in most centers, but probably at a slower pace. Factory work layoffs continue and many companies are trimming office workers and executives—often by forcing early retirement. Total employment is not being sustained, as in the past, by the service sectors. Many utilities are reducing staff, and jobs in finance and retail trade are not expanding significantly. The City of Detroit has announced a 25 percent staff reduction to help balance its fiscal 1976 budget.
Large general merchandisers, other than "discounters," were disappointed with March sales—far below last year after adjustment for inflation. The early Easter clearly didn't help. Retailers' inventories are reported to be in good shape after reductions starting in late 1974.
Although construction contracts and building permits in the District remained at very low levels through February, there are reports that improved availability of credit is beginning to activate transactions. Savings inflows at S&Ls have been very favorable. These institutions have been able to repay debt and are actively seeking mortgages. Developers of various residential and commercial projects are coming out of hibernation after 6-8 months. Rapid release of impounded water and sewer funds would help construction activity.