February 9, 1977
Apart from the impact of severe weather, the stronger tone in business activity that developed late last year in the district continued in January. Retail sales were excellent in both December and January. Inflation prospects have worsened, mainly because of weather-related developments. The capital expenditure outlook remains spotty, but some sectors report demand at high levels. Construction forecasts have been increased. Farmland prices in the district continue to rise at a rapid pace.
One major result of the winter cold will be a new impetus to price inflation. Production losses cover a wide range of goods, and uses of alternative fuels and alternative transportation will increase costs. One company has notified customers that an "emergency fuel surcharge" will be added to the price of a product. Many special deals to procure extra fuel supplies may not be fully reflected in the usual price indexes.
Natural gas curtailments have had their most serious impact in this region in Indiana where the state labor service estimates that over 40,000 were out of work late last week. Motor vehicle assemblies in Michigan have been reduced mainly because parts shipped from other states were not available. Some layoffs have occurred in Wisconsin when gas cutoffs were ordered at large firms. Many of these companies have turned to alternate fuels which also are in short supply, especially so in the case of propane.
Manufacturers have been turning away from natural gas for several years because of the high price as well as reduced availability. The severity of the fuel problem varies by company rather than by industry. For some the situation varies day by day. Some workers laid off have been returned to work. Some gas curtailments have been relaxed recently, at least for smaller customers. The steel industry concentrated in Northern Indiana has been put on a "plant protection" basis by gas utilities, probably through February. (About 10 percent of the workforce has been laid off, but this could worsen.) This was a surprise move after a partial cutback in supplies. At one large plant there is no significant need for gas. At other plants certain processes cannot be performed without gas.
The fuel situation in this district is complicated by the fact that waterways are frozen and barges carrying oil, coal, chemicals, salt, and other products are either stopped or moving very slowly. The problem has been helped in some cases by relaxing state regulations on burning coal or oil with higher sulphur content. A large producer of appliances in the Chicago area had indicated that it would be forced to close if it were not allowed to burn a lower grade of oil.
Railroads have been moving additional freight that normally moves by barge. Also, piggyback traffic has increased. Rail movements have been hampered by derailments and other cold-related developments. Frozen coal in freight cars has prevented or slowed unloading.
Retail sales, both hard and soft goods, were strong in January, following an excellent December. Weather-related items and auto parts and supplies have been especially strong. For example, many stores have sold out electric heaters, and do not expect new shipments this season. Observers fear that big heating bills will drain consumer purchasing power.
Sales of cars slowed somewhat in late January, but this is expected to be temporary. Stocks of small cars are excessive and a series of cuts in production schedules have been necessary. Meanwhile, overtime has been common for plants producing the most popular standard-size and intermediate models. Sales of heavy trucks and trailers have continued to improve and further gains are expected. Machine tool producers expect to increase shipments substantially this year, especially to the auto industry. Most industries expect to increase capital expenditures this year. The tendency has been to boost plans when adjustments are made. Orders for construction equipment continue at a low level.
Forecasts of housing starts have been increased because of the large supply of funds available in savings and loans and life insurance companies. Many expect mortgage rates to decline this year even if other rates rise. Some believe that single-family home construction will be limited by supplies of building materials such as gypsum board, insulation, and certain types of lumber. There are signs that construction of commercial and manufacturing buildings will increase also. Considerable repair and maintenance work will be required on gas and water mains and other structures injured by frost.
Farmland prices in the district increased by 6 percent in the fourth quarter, according to our survey of bankers and were 28 percent above year ago. The boom in prices started in late 1972 and has accelerated. New classes of investors in farmland are helping to boost prices.