September 14, 1977
The business upswing appears somewhat less vigorous to observers in the Seventh District than a few months ago. Few, if any, believe that a general letdown is in prospect over the next several months, but most corporate managements are not in a mood to take on substantial new risks. The capital expenditure picture continues mixed, with lighter products and components appreciably stronger than heavier items in most categories. Building materials are hampering completion of housing units in some areas. Most other goods appear to be in ample supply and inventory buying policies are under close rein. However, oil product inventories are above desired levels. The general energy picture, including natural gas, appears favorable for next winter. Farm crops appear excellent, but concern over the impact of low prices on farmers is growing.
Large retailers continue to report good increases in sales. Stock-sales ratios are relatively low, but virtually all goods are readily attainable. Sales of home improvement items, insulation, paint, etc.—are excellent.
Sales of both domestic and imported cars are at least matching expectations for most models. Michigan's economic health is much improved. However, the smallest car producer closed one of two assembly lines in Racine only three weeks after output of new models was begun. In addition, a large assembly plant in the Rockford area will be closed for several weeks as lines are converted to smaller cars.
Sales of heavy-duty trucks and trailers continue at high levels. Other relatively strong capital goods sectors include railroad equipment, small construction and earth-moving machines, machine tools, lift trucks, ore processing equipment, diesel engines, well-drilling apparatus, and electrical and mechanical switches and controls. In contrast, farm equipment sales are down sharply. Shipments of large mining shovels, at capacity for several years, are 20 percent below last year and backlogs are much reduced.
The housing market is somewhat less frenzied but still vigorous nonetheless. Completions of housing units are being slowed by shortages or slow deliveries of insulation, bricks, windows, and other components. Many additional skilled workers could be used currently. Mortgage funds are readily available and mortgage rates are not expected to rise, even if market rates do so. Apartment building is continuing to rebound with greatest strength in smaller projects of 10 to 12 units, rather than high-rise units. The Chicago area is experiencing a surge of conversions of rental buildings, some very large, to condominiums.
Sheet and other lighter steel products are in good demand. Heavy structurals, large castings, and other products for capital goods continue to lag. Imported steel is penetrating the Midwest to an unprecedented degree. With lead times short steel buyers are not interested in rebuilding inventories. Short runs on particular steel products are hurting mill profits. Some steel companies have undertaken drastic cost-cutting programs. Such actions created rumors, since denied, that the South Works in Chicago (one of the city's largest industrial employers) would be closed.
The iron ore strike in Minnesota will have a serious impact if it lasts another month or two. Steel companies will attempt to move more ore through Lake Superior during the winter than in the past. Rail transport capacity is quite limited. Recent and prospective coal strikes are also a threat to steel output. Experts are puzzled that possible cutoffs of steel supplies do not encourage inventory building by users.
Industrial and commercial companies are continuing their efforts to protect their operations in case of another severe winter. Among steps taken are conservation, increased storage for oil and propane, new proprietary gas wells, realignment of processes to reduce dependence on natural gas, and detailed contingency plans to implement in case of a cutoff.
The natural gas outlook is much better than expected. All storage fields are rapidly being filled to capacity—including some new fields. District utilities have contracted for additional gas and some have participated in successful new finds. Short of a diversion elsewhere, there should be no problems in the district except perhaps in Indiana. Even in Indiana the major utility has assured customers that it has additional supplies and that it will monitor and manage its send-out more carefully to avoid "surprises." A Michigan utility is accepting new small industrial and commercial customers for the first time since April 1975.
Heavy rainfalls in recent weeks have substantially replenished subsoil moisture in most areas of the district. Generally excellent crops are well ahead of normal development. Corn harvesting has begun, ahead of schedule, in scattered areas. Lowered feed costs are expected to trigger increases in production of hogs and fed cattle. While favorable for general inflation prospects, lower crop prices are causing enhanced concern among farm lenders and those who sell products to farmers. Sales of farm equipment, for example, are down sharply. However, expenditures on crop storage facilities are strong.