February 11, 1976
Confidence in the economic outlook in the Seventh District has strengthened in the past month. Consumers continue to spend at a faster pace. Employment is increasing and unemployment is decreasing. Tough bargaining is in prospect on major labor contracts. Some business firms have raised their projections of sales gains for 1976, and some are raising capital spending plans. Order backlogs are stabilizing. Supplies of goods are ample in all sectors, but upward price pressures persist for finished products. The sales outlook for both cars and trucks has improved. Farmland values are sharply higher. Interest rates on new corporate bonds and on mortgages have eased.
The business atmosphere cannot be described as bullish, but the flagging confidence evident two months ago has been replaced with a less hesitant view of the future. More purchasing managers reported output, new orders, and backlogs to have improved in January. Projections of increases in sales of manufactured goods and services for 1976 either are being raised or are being stated with more assurance. A quarterly survey of consumer confidence in the Chicago area, just released, showed a surge to the highest level in three years, after having fallen back last time. The upswing in the stock market and the decline in interest rates since the turn of the year were especially welcomed because these developments were unexpected. There are many comments that Congress, the Administration, and the Federal Reserve "will not let the economy falter in an election year."
The stronger tone of retail sales noted in the Christmas period has continued in January and February. The list of products that are going well has broadened and includes apparel, auto supplies, furniture, appliances, recreational vehicles, truck-vans, and Citizens' Band radios. A producer of garbage disposal units is producing "full blast" again after a severe drop last year. Retail inventories generally seem in line. However, recent household goods trade shows in Chicago have brought an excellent response suggesting that many retailers are planning to restock in expectation of further growth in consumer outlays. Consumers are using installment credit more freely, and delinquencies and write-offs have improved. Loans on new cars are being held at three years, except for exceptionally good risks.
Job markets continue to improve gradually, but unemployment remains very burdensome in the inner cities. Current and prospective labor negotiations are uppermost in the minds of many executives. A major airline was well pleased with a recent settlement that provides a first year wage boost of "only" 8.5 percent. The Teamsters are starting talks this week in Chicago. As before, the Chicago union is bargaining separately and is expected to set the pace. (Initial Teamster demands are very large.) The UAW is pressing for COLA increases for pensioners. An appliance union demands "30 and out," which management strongly opposes.
Among the industries that have raised sales projections for 1976 recently are motor vehicles, steel, and airlines. An oil company expects a 6.5 percent rise in total petroleum product sales, following a 2 percent decline last year.
Among firms that have raised capital spending plans for 1976 recently are motor vehicles, electric utilities, and chemicals. Oil companies say they are cutting back. Machine tool bookings are still very weak, but some producers have substantial backlogs. Increased sales of some smaller capital goods may be satisfied from field stocks for several months. Heavy construction equipment sales dropped off sharply late in the fourth quarter and are not expected to recover soon.
Output schedules for trucks, including heavy trucks, have been raised substantially recently, but from very low levels. Auto companies are pressing programs to offer broader lines of light-weight cars—under 3,500 pounds. There has been an unusual amount of juggling of auto output schedules recently to adjust unbalanced inventories to buyer tastes, but total assembly schedules have been maintained and the tendency has been to raise sights on sales for the year.
Inflows of savings to S&Ls have continued at advanced levels. Loan commitments are being made more freely and terms are easing. At least one Chicago area S&L is offering 80 percent, 30-year loans, at 8.5 percent, plus "two points." Most loans are at 8.75 to 9 percent, down slightly in recent months. Builders and lenders maintain that most proposed new apartment projects do not offer prospects for profits at present levels of rents. Rents on existing apartments are under upward pressure, partly because of sharply higher costs of fuel and maintenance.
District analysts expect food prices to rise at a faster pace in the second quarter more than offsetting a slowdown in the first quarter associated with declines in prices of cattle and processed foods late last year and early in 1976. Cuts in wholesale prices of processed fruits and vegetables are not fully reflected at the retail level. Fertilizer inventories are heavy and prices have declined recently. Farm equipment sales are expected to be larger this year. This Bank's survey of farmland values shows further increases in the fourth quarter to levels 22 percent above last year on average. Credit conditions at rural banks are much improved this year, because of good deposit growth and agricultural loan repayments.