October 11, 1977
Although conditions vary, sector by sector, activity in the Seventh District appears to continue to advance at a modest pace. Consumer sentiment is stronger generally than business confidence. Some forecasts have been lowered moderately, both for the economy and particular products. Retail sales continue vigorous, with credit use increasing. Shortages are largely confined to residential building materials. A serious morale problem has developed in the television and steel industries. Capital equipment demand is quite mixed. Reports on price inflation also vary, but the underlying rate of rise is probably unchanged. Home sales are still strong. Nonresidential construction prospects have picked up. The fall harvests have been slowed throughout the district by heavy rains, but large crops are still probable.
Large retailers are pleased with recent sales. The largest retailer is said to be leading the field with heavy promotions and price cuts on selected items. Not all competitors are able to counter this competition effectively.
Auto dealers are said to be enthusiastic about the new cars. Auto inventories are short for some models and excessive for others. Auto companies are forced to push small cars to meet mileage requirements, although these models are "not profitable." Captive imports can be averaged into a company's mix to a limited degree. Captive finance companies are leading the trend toward 42- and 48-month loans, and say the credit experience has been excellent.
Business executives are concerned about energy, regulations, possible tax changes, foreign imports, inflation, the depressed state of the stock market, and prospects for higher interest rates. This causes them to pursue cautious policies on inventories and major capital outlays. Recent announcements of planned cutbacks by a major Chicago-area TV producer and cost-cutting efforts of various steel companies have no clear counterparts elsewhere as yet, but the effect on morale has been widespread. A year ago, even six months ago, these industries foresaw high level operations and good profit margins for this time.
Purchasing managers in the Chicago area reported a somewhat faster rate of rise in output, orders, and employment in September. Delivery lead times increased slightly, but, except for building materials, there are no exceptional procurement problems. About 60 percent report paying higher prices each month, compared to 2 percent paying lower prices.
Although all steel companies are worried about steel imports, the impact varies by product line and by company. Some of Chicago-area plants are modern and well-maintained, while others are not. The recent announcement of the shift of a steel company headquarters from Youngstown to Chicago will not increase steel employment or output here.
Most observers here accept the view that the underlying rate of inflation is about 6 percent. A general merchandise firm estimates that its prices average 4.2 percent above last year, with imported goods accounting for 15 percent of all sales. Costs of services such as insurance, professional fees, medical care, and taxes continue to advance at a rapid pace. A recent survey shows that the average cost of a hospital stay in the Chicago area ranges from $200 to $400 per day (excluding doctors' services), double the level of four years ago. A large share of this rise reflects more elaborate treatments.
Sales of most types of business equipment and components continue to increase at a good, but "unexciting," rate. Among the stronger sectors are earth-moving equipment and well-drilling equipment. Sales of trucks and trailers have softened recently, but the outlook is still good. Orders for freight cars and locomotives are much improved. Among the weakest types are equipment for steel mills and for farmers. Farm equipment sales have been hurt by reduced net farm income, large sales in previous years, larger farmer debts, and prospects for acreage curtailments. Nevertheless, a huge tractor plant in Iowa will be substantially expanded. Auto companies are spending huge sums on plant and equipment to produce cars with better gas mileage, far more than would be the case if mileage standards had not been mandated.
The energy outlook continues to be favorable. A major gas transmission company headquartered in Michigan is prepared to take on additional large industrial customers, but gas must be for "essential processing" rather than boiler fuel. Many interruptible industrial gas customers in other regions have turned to alternative fuels, thereby releasing supplies for priority users.
Completion of housing units is being delayed by shortages of various materials (especially insulation) and skilled workers. Contracts for office and apartment buildings have picked up, including some major projects that were "shelved" in 1975.
Although rains have slowed agricultural field work, the harvesting is ahead of normal because of an earlier start. Virtually all corn and soybean crops are mature. An early killing frost would have only minimal effect. Wet weather has increased pest infestations. As yet, conditions do not appear serious.