Beige Book Report: Chicago
May 14, 1975
Economic prospects in the Seventh District continue to be highly uncertain. The best that can be said is that the rate of decline in general activity has slowed. Residential construction has not revived significantly, despite heavy savings inflows to S&Ls. Capital equipment output, in total, appears to be in the opening stages of a long and, probably, steep decline. Desired inventory reductions at the manufacturing level, overall, are far from complete. Consumers' outlays on virtually all hard goods remain at very depressed levels. Prospects for a substantial increase in crop harvests are generally good, although rains have delayed some plantings. Competitive forces are dampening price increases in the manufacturing sector. Many prices have declined recently, most notably prices of processed foods, at both the wholesale and retail levels. Meat prices, however, have increased sharply.
Because of the Seventh District's concentration on durable goods manufacturing, this region probably has been hit harder by the recession than the nation generally—just as the upsurge in activity was more pronounced here. Order backlogs of most firms have declined sharply. Order cancellations have been heavy, partly reflecting the reductions in lead times that have removed the inventive for anticipatory ordering. Many firms have instituted stringent cost-cutting programs, and have deferred or stretched out capital spending programs.
Perhaps the greatest disappointment of recent weeks has been the lack of significant improvement in residential and commercial building, which remains at extremely depressed levels. Most S&Ls have used the heavy savings inflows to repay debt and rebuild liquidity. Forward mortgage commitments are virtually unobtainable in Illinois, where the usury rate is scheduled to drop from 9.5 to 8 percent at midyear. Throughout the district, sales of new or existing homes have remained very slow. Chicago area homebuilding permits have been at the lowest level since World War II.
Some builders have announced reductions in house prices of 10 percent or more, despite rising costs, to attract customers. Recent bids on new construction projects often have been below estimates, and many more bids are being received on proposed projects. There is evidence of a pickup in repair and remodeling work, perhaps in lieu of new construction. Early indications that building trades unions would moderate their demands significantly, have given way to new militancy in the face of very heavy unemployment. Chicago area painters have just gone on strike after rejecting a 6.6 percent pay boost.
The tax credit on home purchases has not been of much help, partly because of the complicated rules. Similarly, the increase in the investment tax credit is not a powerful incentive because most industries have idle facilities. Moreover, three percentage points added to the tax credit is only a partial offset to increases of 20 to 30 percent or more in prices of equipment in the past 12 to 15 months.
Large retailers are curtailing expansion plans, partly reflecting reduced residential building. Steel producers are moving ahead with basic expansion programs, despite a sharply reduced level of new orders and renewed concern over imports. Demand for most types of equipment for mining, heavy construction, and water and sewer projects remains excellent. Sales of the largest farm tractors and combines also remain very strong. However, demand for lighter construction and farm equipment, and for most types of industrial equipment is off sharply. Sales of large trucks remain very poor and railroads are said to be canceling orders for equipment. Foreign demand for various equipment is very good, especially from the Communist bloc, OPEC nations, and Germany. Favorable exchange rates encourage sales abroad.
Most consumers continue to spend very cautiously. Some producers of laundry equipment and TV sets have announced callbacks of laid-off workers, but any revival of sales has been modest. Demand has remained very weak for mobile homes, RVs, air conditioners, pleasure boats, lawn and garden machines, and, of course, autos (except for imports and specialty and luxury models). Consumers have slowed purchases of processed foods this year. Relatively large inventories of these foods at the wholesale level are associated with price reductions averaging about 10 percent at Chicago area food chains.
Spring plantings are on schedule, or ahead of schedule, in Illinois and Indiana. Rains have delayed plantings in Iowa, however, and continuance of wet conditions past mid-May could reduce prospective yields there. Farmers are buying equipment more cautiously. Prices of farmland in the district rose 2 percent, on average, in the first quarter, according to bankers' reports, the smallest quarterly rise in three years.
A final note: There is no lack of statements of general views that the recession has bottomed out, and that the second half will see significant real gains in activity. These encouraging generalizations usually are buttressed by references to tax reductions, dampened inflation, easing of supplies, inventory liquidations, slower rates of decline in new orders, large savings inflows, and lessened consumer pessimism indicated by surveys. But very little solid evidence of improvements in particular types of activity can be adduced, and some manufacturing sectors have only begun to slide off.