July 14, 1976
The economic outlook continues favorable in the Seventh District, although the pace of the upswing probably has moderated since the first quarter. Unemployment has declined significantly in all major centers, but remains high compared to pre-recession levels, especially in Michigan. Despite publicized reports of weaker national performance of employment and retail sales in recent months, there is little apprehension in the District that the general expansion is near a peak. Motor vehicles and many types of smaller capital goods are selling well, but orders for heavy capital goods continue slow. Various equipment producers, however, express confidence that new orders will strengthen in the next six months or so. Single-family home construction continues at a high level, but other construction sectors remain depressed.
Executives continue to be cautious on commitments to increase investments in inventories and plant and equipment, and on new hirings. In large part, this reflects still-fresh memories of the excesses of 1973-74. But they complain of various government regulations that restrict managerial discretion, and there is apprehension that this fall's elections will produce a less stable political environment.
Most firms either are adding to staff or, at least, are not cutting back. Help-wanted advertising in the Chicago area rose significantly in March and since then has been running 80 percent above year-ago, and has been very close to the level that prevailed in 1973 and in 1974 until September when a sharp decline began.
Capacity continues to be ample in virtually all sectors. However, new cuts in natural gas allotments have been announced for the winter season. Limited availability of gas supplies is reported to be deterring expansion of industrial firms in Wisconsin. A recent heat wave in Indiana caused reductions in electric power available to manufacturers. Possible shutdowns of nuclear plants present a continuous threat to power supplies. Lead times on new orders for materials and components have stretched out further, partly because suppliers are reluctant to increase staff. On the brighter side, oil companies are less concerned about gasoline shortages this summer because refinery operations have been adjusted to increase supplies more readily than had been expected.
Opening steps have been taken to exploit a substantial body of copper ore in Northern Wisconsin. A Chicago steel firm contracted recently with partners to substantially expand two iron mines in Northern Michigan that produce low-grade ore which is converted into pellets.
Various firms have taken steps to assure future supplies of materials and components against a recurrence of the bottlenecks of 1973-74. They have expanded their own facilities, purchased plants of smaller companies, and have attempted to arrange firmer commitments from suppliers.
Some retailers were disappointed by sales results in May and June, but they do not appear to have lowered their sights for the year as a whole. The extent of sales promotions of seasonal merchandise since July 4 does not suggest a heavy overhang of goods. Appliance sales have been somewhat weaker than expected, especially refrigerators and freezers. The failure of appliance sales to expand further may reflect large purchases of autos and other vehicles, heavy vacation spending, and the higher proportion of new housing units represented by single-family homes.
As the 1976 model year draws to a close, shortages of popular intermediate- and full-sized cars are cited more frequently. Gluts of some small cars are substantial. The smallest auto producer, which concentrates on small cars, stopped assembly of 1976 models on June 25, several weeks earlier than usual. The "Big Three" are pushing large car output to the limit, mainly using overtime rather than extra shifts. Local strikes at crucial plants have impeded auto production. The model changeover period apparently will be shorter than had been expected earlier, but new models will not be produced on the same assembly lines as old models (as in the past) because many 1977 models are "not compatible." Availability of tires is not an immediate problem despite the long strike.
The heaviest trucks are now selling well again and the uptrend in sales of lighter trucks, with an increasing share going to consumers, remains "phenomenal." Demand for semi-trailers has picked up at least as fast as sales of heavy trucks. Farm equipment sales, especially heavy tractors, have exceeded expectations and inventories in the field are moderate. Export sales of farm equipment also have been strong. Sales of lumbering equipment, lift trucks, and smaller construction equipment are well above recession lows.
Output of some types of heavy equipment remains at high levels, but backlogs for virtually all types continue to shrink. The volume of inquiries and quotes have been at a good level, however, and firm orders are expected to increase as the general expansion continues.
Recent and prospective increases in steel prices are expected to hold up. Cold-rolled sheets are "effectively on allocation." Demand for heavier steel products has increased somewhat. Steel mills, like most other manufacturers, will schedule normal summer vacations this year, despite lengthened lead times.
Single-family homes continue to lead construction. For the first five months home permits in the Chicago area were close to the high levels of the early 1970's, but apartment permits were only a fraction of that level. Apartments have accounted for only 30 percent of Chicago area permits this year, compared to almost 60 percent in 1971 and 1972. Commercial and industrial construction prospects remain poor through year-end. Sales of mobile homes have increased sharply from last year's low level, but no early approach to peak rates of 1972-73 is anticipated.