June 15, 1977
Seventh District executives and analysts see the expansion continuing at a good, but not exuberant, pace. Price inflation is not expected to abate in any time frame employed for planning purposes. Retail sales are excellent. Shortages and stringencies are not yet worrisome. Equipment spending is rising overall, but varies in strength by product. Speculative elements and second mortgages are not believed to be significant in purchases of single-family homes or farmland.
Throughout the district employment, retail sales, output, orders, and order backlogs continue to rise at a moderate pace. Few if any sectors are declining, but the pace of advance varies greatly among industries and among product lines within industries.
Employers plan to increase hirings in the next several months, including college graduates. Unemployment is declining gradually in most areas. There are complaints about the quality of job applicants.
Retail sales of two large national chains headquartered in Chicago have been well above budgeted levels in May and June. Inventories of some items, mainly hard goods, have been below the levels necessary to maximize sales. Sales of appliances, trucks, domestic large cars, and imported small cars have been especially strong. Airline passenger traffic and sales of large RVs, on the other hand, have not matched expected levels.
The upswing in spending on equipment is well grounded, but strength of demand varies greatly. For example, construction equipment sales have increased substantially this year, but only to a slight extent for the larger units using diesel engines. A producer of large mining shovels and heavy overhead cranes continues to produce and ship at a high rate, but order backlogs are being depleted. Orders for components such as controls, bearings, electric drives, electric motors, and fasteners are well above last year—back to very high 1973 levels for one company. Some production managers are unwilling to schedule increases in output, e.g., of construction equipment and heavy trucks, at the level suggested by more optimistic sales forecasters.
Electric utilities were able to handle demand, one-third above year ago in the Chicago area, during the extended May heat wave without apparent difficulties. Electric power also is expected to be adequate when the summer peak arrives—probably in July. Long-term planning by electric utilities is handicapped by uncertainties concerning future demand, environmental restrictions, regulations on nuclear plants, and availability of acceptable conventional fuels.
Steel shipments have been at a high level in recent weeks, especially for motor vehicles and appliances, but increased tonnages also are going to capital equipment producers. Order books are somewhat slim for the summer because of high June deliveries to beat the price hike. A large Chicago steel company is going ahead on schedule with "phase one" of its expansion program to be completed in 1979. "Phase two" has been deferred because of concern over steel imports, availability of fuel, and questions as to the level of future demand—especially from the motor vehicle industry.
Demand for structural steel has begun to revive after a long dry spell. Firm plans for large new office buildings are coming forward again. Demolition has been started in Chicago's Loop to prepare a site for a 40-story building—first large new structure in three years. Much of the overhang of quality office space has been absorbed. Sizable new hotels also are underway or planned.
We are unable to uncover significant elements of speculative purchases of single-family homes. Banks and S and Ls are not offering second mortgages, or equity loans, except in special circumstances. A recent report in a national business magazine that a certain large Chicago bank is about to launch a heavy promotion of second mortgages is categorically denied. Most banks and S and Ls are prepared to renegotiate existing mortgages if homeowners with large equities need cash. Consumer finance companies are actively promoting second mortgages for purposes of debt consolidation, vacations, purchases of recreational equipment, and college costs, but at higher rates than banks are able or willing to charge.
The market for existing homes and apartments continues strong, but fairly stable, after allowances for seasonal factors. Sales of new homes have declined, according to some reports, partly because of rising building costs, but also because many builders have "sold out" this year's schedule. Home building got off to a late start because of bad weather. In major metropolitan areas suitable lots have increased very sharply in price because of limited availability of sewerage capacity, water, and natural gas.
The farmland boom continues unabated in the district. Farmers who desire to expand operations dominate the market, as in the past. They are able to bid aggressively because of the ready availability of mortgage credit. Sharply rising farmland prices have attracted increased interest among nonfarmer investors, both domestic and foreign. Nonfarmer investors have not yet become a significant factor, but their purchases could prolong the boom. Returns to farmland appear to be capitalized at about 1 1/2 to 2 1/2 percent in recent sales, compared to a traditional 5 to 6 percent. Heavy debts could place pressure on cash inflows of farmers.