October 21, 1975
Observers in the Seventh District agree that an upturn in the general economy has been under way since the spring. The expansion is expected to continue, probably through 1976, with total output and the average price level both up about 5 to 6 percent year-to-year. Many important district manufacturers of capital goods and components are still cutting output or at least have noted no improvement in demand. Large retailers report that consumers are still cautious. Nevertheless, there is little concern among informed observers in the district that the upturn will "abort," as expressed elsewhere. Demand for workers continues relatively weak. Virtually all goods and supplies are readily available. Inventories are generally in line at the retail level and manufacturers increasingly are achieving a desired balance. Some types of equipment are being offered at "discounts from list," but underlying pressures to raise prices as and if markets permit are strong. Construction prospects remain very poor. Harvesting of generally excellent crops is proceeding at a faster-than-normal pace. Commercial bank loan demand remains slow.
It appears that executives are less convinced of the durability of the uptrend than their forecasting teams. Market analysts for certain firms producing both business equipment and consumer goods say that operating managers are "scared" and are tending to under-schedule production, despite possible lost sales. This caution reverses the pre-recession exuberance that resulted in excessive inventories.
The preponderance of producer equipment manufacturing in this district accounts for the less pronounced recovery here. Demand for materials handling equipment, logging equipment, and lighter construction and farm equipment, and machine tools is still sliding. Producers of certain large equipment for mining and earth moving continue to operate at the limits of their capacity. Overall, producers of equipment in this district, however, appear to be reducing output. Analysts expressed surprise at the increase reported for the business equipment component of the FRB index for August. Heavy truck sales remain at a very depressed level, but there are early signs that a revival is under way because of continuing gains in highway freight. Increases in sales of all classes of trucks are expected for 1976, but not to the peak levels of 1973-74.
Large retailers report some gradual improvement in sales in recent months, both from catalogs and at stores, but physical volume is still below last year. Gains are reported for all regions, but the north central area remains relatively weak. Credit sales volume has increased relative to total sales and delinquency experience has improved. A Chicago-area department store chain has begun to honor both major bank credit cards, the first full-line department store in the area to do so. Reports of changes in sales by product line are quite mixed, although auto parts and related maintenance are strong everywhere. Outlets for furs, jewelry, expensive cars, and other luxuries report that sales remained strong throughout the recession.
Unemployment remains at high levels in the district and appears to be rising further, especially in Illinois. Increasingly, manufacturing operations are being shifted to other areas, mainly the South, where compensation scales may be only half as great. Only in rare cases is organized labor prepared to make concessions on existing contracts. Teachers and other public employees have been successful in forcing substantial advances in compensation despite budget stringencies. Unexpectedly heavy enrollments at large public colleges, attributed to weak job markets, have overloaded facilities and some schools will not accept new applications for the spring.
Virtually all materials and finished goods are readily available. (Oil and natural gas will not cause problems in the district this winter.) Price concessions are reported in some markets, but virtually all manufacturers expect to increase prices further as demand improves.
Steel executives are indignant over the recent CWPS report which they believe understates future demand and drastically underestimates the industry's needs for capital. The October 1 price increases for steel seem to be holding up. Steel imports are running at a lower rate than expected. Steel consumption is expected to be up 6 to 7 percent next year, which could mean a 15 percent rise in shipments because user inventories have been reduced this year. By year-end 1976 shortages could be a problem again.
Construction activity has not improved, except for some rise in single-family housing. The recent trend toward disintermediation has caused S&Ls to closely restrict new commitments. In the Chicago area single-family home permits have increased this year, but are almost 40 percent below the average for 1971-73. Permits for apartments are down sharply from last year's low level to a rate only one-fourth as great as in the good years. Architects for residential, commercial, and industrial projects have "nothing on the shelf or on the boards." A large surplus of office and store space exists in all major centers. Mobile home shipments are expected to total only 220,000 units for 1975. A pickup in both conventional housing and mobile homes is expected for 1976, but a significant rise for both sectors depends on availability of credit which is increasingly uncertain.