November 9, 1977
With the agricultural sector a notable exception, the economic outlook in the Seventh District appears to be generally healthy. Retail sales are reported to be vigorous in virtually all categories. Capital outlays are still increasing, and perhaps at a somewhat faster pace, but the picture varies greatly by product. Except for continued stringency in residential building materials, supplies of goods are ample. Agricultural credit conditions have deteriorated significantly in recent months. Demand for credit is generally strong except for large business loans. Interest rates have strengthened moderately.
Concern expressed in the third quarter that the expansion might be at or near a peak has largely dissipated. Most executives and analysts share the opinion that activity will continue to grow, at least through the first half of 1978. Ready availability of virtually all purchased materials is encouraging business firms to closely control, even reduce, inventories. However, holdings of fuel oil and propane are very large, and will be maintained at high levels.
Major retailers report sales to be at good levels, and they plan on a strong Christmas season. Hard goods continue to lead, while fashion-type apparel is relatively weak. Home improvement items, automobile supplies, refrigerators, electric ranges, microwave ovens (many from Japan), dryers, and disposers are doing especially well. Installment credit is being used freely, indicating consumer confidence, and delinquency experience is excellent.
The slowdown in auto deliveries in September partly reflected the delayed availability of some new models. These were introduced in early October, and apparently were well received. The strength of the auto market varies greatly by model. Periodic shutdowns of various district plants have been required to control stocks of less popular cars, while other models are in short supply. Inventories of popular imports are down sharply, which may be holding back sales.
The uptrend in sales of heavy trucks and trailers leveled in September and October. Opinions differ as to whether this lull is only temporary. Sales of light trucks, many to consumers, continue strong.
The auto industry, at least the two largest producers, are in the midst of massive programs to downsize cars. Orders from the auto companies are largely responsible for strength reported in machine tool orders, especially presses and transfer machines. Originally concentrated in equipment, auto industry capital spending programs now include a substantial commitment to new structures and expansions of existing buildings to be ready in 1978, 1979, or later. There are fears that the third and fourth ranking auto producers cannot finance the capital outlays required to produce the mix of cars that will meet federal rules.
Most producers of capital equipment report orders to be "good but unspectacular." Our impression is that the general picture is somewhat better than a few months ago. Among the strongest types are machine tools, construction equipment, freight cars, well-drilling apparatus, fluid power, and electric motors. Farm equipment and heavy mining equipment are very weak. Orders for mining equipment and replacement parts have been hurt by the iron miners' strike.
Many homebuilders complain that shortages of insulation have delayed completions by a month or more. Some have been unable to provide the extra heavy insulation they had promised home buyers. Housing analysts expect that starts in 1978 will be about the same as this year with apartments somewhat higher and one-family units somewhat lower. Aside from insulation, there are complaints of shortages, or poor quality, covering a long list of components. Substitutions often have been necessary. There is a general shortage of really skilled building trades workers, with consequent reports of "shoddy" construction.
Real estate transfers continue at a high level, about 30 percent above last year. A wave of condominium conversions of rental units in buildings large and small, new and old, is in progress with a substantial volume of funds required to finance purchases by (often reluctant) renters. Meanwhile, rents are gradually rising to a point that is encouraging promoters of new apartment buildings. Mortgages funds continue to be generally available, but some S&Ls have raised their basic rate from 8.75 to 9 percent. Usury ceilings are no longer a threat in Illinois because a flexible formula is used now.
Nonresidential construction activity is improving. Office buildings lead the uptrend, but industrial building also is picking up. Virtually all new plants or plant expansions are located in outlying areas or smaller towns. Outlays to build or repair highways and highway structures, and to build sewer and water systems, are rather strong, but the rest of the public sector, especially school buildings, is weak.
Our latest quarterly survey shows a decline in farmland values for the first time since 1960. In the past five years these values had increased by 160 percent. The overall decline for the district for the third quarter was 1 percent, but reports by states range from an 8 percent decline for Illinois to a 4 percent rise for Wisconsin.
Farm credit conditions have deteriorated markedly in recent months with rapid loan growth, slower loan repayments, increased loan renewals, and reduced bank liquidity. Almost half of the rural banks view their loan-deposit ratios (now averaging 64 percent) as "excessive." This is about double the normal proportion expressing this view.