July 13, 1977
The general business outlook in the Seventh District appears favorable through 1977 and into 1978. Widespread confidence that activity will continue to expand, however, is tempered by an unusual degree of caution in making commitments to invest in inventories or substantial capital spending projects beyond obvious requirements. Consumer spending continues vigorous, especially for durables. The housing market has lost some of the "frenzy" of last spring but retains great momentum. Crops are growing well in virtually all areas of the district.
Few basic products, either raw materials or components, are in short supply, but there are complaints of limited availability of rail and highway transportation. A major producer of building materials, for example, says both freight cars and trailers have been short and some units furnished have not been usable. An analyst of the trucking industry has argued for several months that a capacity crush was developing in highway transport and that orders for new trucks and trailers, while up sharply from last year, were not rising at an adequate pace. A major Western railroad has been pleased with the pickup in important classes of traffic this year. This line recently ordered 124 new locomotives, compared to none in 1976. Track maintenance work has been increased substantially.
Purchasing managers in Chicago and Milwaukee reported continued gains in output, employment, new orders, and order backlogs for June. Prices paid continue upward at about the rate of recent months. Inventories are increasing only moderately. Most companies expect the expansion to continue well into 1978. Inflation is the number one concern.
The improvement in demand for capital equipment is still underway, but the heavier types of equipment are still lagging. On the whole, the picture is somewhat disappointing with the expansion at a relatively advanced stage. A number of large capital goods producers are taking longer vacation shutdowns this July, up from two to three weeks, as required by union contracts.
Consumer spending still buttresses the expansion, with emphasis on durable goods. Credit is being used freely with fewer collection problems. Larger purchases of durables, including most types of appliances, have helped the performance of large chains specializing in these goods.
Production schedules for cars and trucks have been increased, at least for the most popular models, as a result of strong sales. Sales of recreational vehicles are reported to have rebounded vigorously after a slump that followed the President's energy messages in April.
Office space occupancy in the Chicago area has returned to 1972 levels. Construction of three sizable (not "giant") office buildings is now definitely slated for the Loop, and other sites are under active consideration. Some analysts expect an office "space crunch" in two to three years. On the other hand, few new shopping centers are underway or planned. Moreover, rents must rise substantially further to justify large new apartment buildings. Even so, plans for such buildings are again under active consideration. A large supply of vacant industrial buildings exists in Chicago and other large district centers. Most new industrial buildings are either specialized types or are expansions of existing properties.
The frenzied demand for single-family homes appears to have moderated somewhat. The picture is somewhat clouded because of seasonal trends. Also, some builders have stopped taking orders for this year or have pushed out delivery dates from the usual four to five months to seven to 12 months. Finally, buyers have begun to show resistance to rapid price increases. Apartment building has picked up, but with more buildings of only four to 12 units. Several large apartment units are being converted to condominiums, with rapid sellouts if prices are right.
Some S&Ls have stopped accepting mortgage loan applications except from customers. But "customer" is defined broadly to include referrals from builders or brokers with whom the lender has a "relationship." The typical rate on 80 percent 25-year loans is still 8.75 percent. No severe credit stringency is expected. Capacity to process loans is taxed, however. Savings inflows have held up well, and loan repayments are very large. Large S&Ls are more interested in obtaining funds from sales of large CDs. Substantial funds could be borrowed from the FHLBs.
Recent declines in prices of major crops, paced by soybeans, have disturbed some bankers with substantial portfolios of loans to farmers. Growing conditions are favorable, much better than had been expected earlier in the year. Higher livestock prices, partly reflecting reduced estimates of pork supplies in the second half, have eased concerns of bankers emphasizing livestock loans.
Most banks see little change in the generally sluggish demand for loans from large businesses. Many large firms have ample internal cash flows. Some have sizable holdings of Treasuries that could be liquidated. Sales of securities, including private placements, have reduced needs for bank loans. Medium- and smaller-sized firms have been using bank lines all through the expansion. Some banks have been seeking out smaller companies more aggressively. There is a trend toward reducing, even eliminating, compensating balances.