November 12, 1975
The recovery continues to lag in the Seventh District, and job markets remain relatively weak. Mainly this reflects declining sales and backlogs for producer goods and a less-than-vigorous revival in demand for consumer hard goods. Inventories are still being brought into line, and buying policies remain cautious. Except for some monetarists, most economic analysts are confident that a broad and extended upswing is under way. But many businessmen are skeptical. Prospects for an early revival in construction remain dim despite lower short-term interest rates. Bank loan demand remains very slow. Reverberations from New York's financial difficulties have not been significant in the district. The rapid progress of the excellent corn and soybean harvests has caused transport and storage problems. Farmland values have increased sharply since midyear.
Most economic analysts in this region believe that the economic upswing will continue at a favorable pace throughout 1976 and perhaps into 1977. Many business and financial executives have not bought this forecast and have remained very cautious in their planning. Recently some prominent monetarists have predicted a general letdown if a more vigorous growth in aggregates does not occur.
New claims for unemployment compensation continue to exceed the advanced levels of a year ago by a generally wider margin in the district than in the nation. Few companies are hiring actively, and voluntary separations remain at a low level. In industries such as motor vehicles and appliances where layoff lists have been reduced more or less substantially, employment remains well below 1973 peaks—20 percent in the case of motor vehicles—and overtime is rare. Enrollment at Illinois colleges and universities is up 11 percent this semester—19 percent at community colleges—and the surge is attributed commonly to lack of employment opportunities.
A general reversal of the letdown in spending on capital goods does not appear likely until mid-1976. Order backlogs for virtually all producer equipment and related components continue to decline with no early sign of a reversal. Material-handling equipment, lumbering equipment, smaller construction equipment, and heavy trucks have been particularly hard hit. There is some early evidence of a revival in demand for heavy trucks and trailers, but from a very depressed level. One large steel company has delayed work on a huge new plate mill in the Chicago area, but another large steel company appears to be pushing ahead with its basic expansion program. Some machine tool builders are obtaining new orders from construction equipment companies for production machines. Other machine tool builders report a rise in inquiries and quotes but little in the way of firm orders.
The majority of manufacturers are still cutting inventories. Order lead times remain very short, and buyers are able to shop around for the best terms on materials and components. Some inventories appear to be approaching leanness, however. Price cuts are much less common, and price increases are more frequent. It is possible that plans to cut inventories further will be altered quickly as lead times begin to stretch out again. Distributors of paper products, for example, report a surge in orders attributed partly to strikes in Canada and partly to a desire to rebuild a LIFO base by year-end for tax purposes.
The financial problems of New York City have had little observable impact in this district. A recent nationally publicized report that Chicago could not sell a certain bond issue because of the New York situation was erroneous. There have been widespread complaints by government officials, however, that rates on all municipals have been inflated by the crisis. Quite apart from outside influences, virtually all state and local governments in the district are closely restricting expenditures to prevent unbalanced budgets and/or additional borrowing. Recent increases of 10 percent and more in compensation of teachers and workers and increases in other costs have required cutbacks in municipal programs. Various states are planning to increase taxes on employers to rebuild depleted unemployment compensation funds.
The recent decline in short-term interest rates has surprised most analysts but is regarded as a healthy development. Mortgage rates have not softened and are reported to have increased further for commercial properties. Fears of disintermediation have moderated, but S&Ls remain cautious on new commitments. Business loan demand at banks continues to be slow and less than expected.
The corn and soybean harvests are well ahead of schedule, and grain is in excellent condition. Large crops and the rapid completion of the harvest have created an abnormal pileup of grains—some on the ground—and rail cars are a bottleneck. Hog prices have dropped very sharply in recent weeks with a temporary bulge in marketings, consumer resistance to high prices, and the (probably groundless) nitrite cancer scare all playing a role. Our survey of farmland values shows a 9 percent rise in the third quarter to a level 17 percent above a year ago. Early this year land values were expected to level off or even decline.