March 10, 1976
The significantly improved tone in business and finance in the Seventh District noted a month ago has generally been confirmed by more recent developments. Various forecasts of increases in activity have been raised, are presented more confidently, and are more frequently extended into 1977. Retailers are pleased with recent increases in demand—"across the board". Some new layoffs have been announced, but total employment appears to be rising. With notable exceptions, price inflation seems to be gathering momentum mainly because of increased worker compensation. Mortgage funds are more available, especially for single-family homes. Near-term prospects for a significant rise in total capital spending remain poor.
The business expansion is based on the greater willingness of consumers to spend confidently (and to use credit) to purchase products in virtually all categories. One large general merchandiser, who had been very skeptical of reports of improvements several months ago, now says that customers are buying more freely, especially the "middle and top" lines. Inventories are moderate, and profits have improved significantly. Perhaps the most dramatic improvement in this quarter has been in major household appliances. Except for freezers, which were booming early last year, sales of appliances have strengthened and inventories are uncomfortably low at the factory and distributor levels. Recreational vehicles also are doing much better.
Demand for workers has improved overall, and unemployment claims are down sharply. A producer of diesel engines says that all laid-off workers have been recalled. Similar reports came from a steel company and an appliance firm. On the other hand, a disquieting number of reports tell of layoffs in the near future. A large airline is cutting its headquarters staff by 10 percent to help restore profitability, several manufacturers have announced plans to shut plants in Chicago permanently, new layoffs will occur at a Kenosha auto plant that produces small cars and a Rockford plant that produces large cars, and the city of Detroit has scheduled reductions in staff of 4,000 workers, or 20 percent, by July 1 to reduce the prospective deficit.
Chicago area teamsters are demanding a 35 percent increase in compensation over three years and an unlimited cost of living adjustment. These demands may be scaled down but not much, judging by negotiations already determined elsewhere. Nonunion truckers are said to be gaining business.
Employers in Michigan and Illinois are concerned about a workmen's compensation "crisis". Liberalized laws and new rulings have greatly expanded actual and potential payouts. Insurance costs have increased 50 percent in recent renewals, and costs are expected to go much higher. Some employers are finding that such coverage is difficult to obtain at any price.
The outlook for capital goods is mixed, with some firms still operating at capacity and others working off backlogs rapidly. Large mining equipment is still backlogged, but demand for smaller types has weakened. Output of railroad equipment is declining, with no reversal in sight. Producers of trucks have raised output schedules but from very low levels. Farm machinery sales are expected to be excellent this year. A diversified producer of capital goods is "much encouraged" by a pronounced improvement in orders for February, especially for materials-handling equipment. Orders for structural steel and plate used mainly in equipment and heavy construction remain weak, in contrast to substantial strength in light products used in autos and appliances. Demand for heavy castings and forgings also remains depressed. Major architectural firms are reducing staff because of the small volume of proposed new work in the United States.
Mortgage funds are increasingly available from savings and loan associations and other lenders at gradually lower rates. New home mortgages are down to 8 1/2 percent in a number of areas. Mortgage rates on apartments and well-placed commercial properties have dropped under 10 percent. Nevertheless, any improvement in new construction this year is likely to be concentrated in single-family homes. A construction cost index for the Chicago area rose only 5 percent in the past year, half as much as in earlier years. More important, bids on new construction projects are down significantly in many cases for the first time in many years, especially for structural steel work, as "hungry" contractors compete for business.
Large crop plantings are in prospect in the District. Farm machinery sales have been unseasonably good and are expected to rise for the year. Prices of some types of fertilizer are down very sharply. Some sales of Iowa farmland at $2,000 amaze experienced observers. Such sales are still rare, but it is said that anyone who owns a section of Iowa land is, per se, "a millionaire". Life insurance companies are showing renewed interest in farm mortgages. The recent decline in wholesale beef prices was surprising to observers and is expected to reverse in the second quarter. Further reductions in retail beef prices are expected.