March 15, 1978
Business activity in the Seventh District was depressed by severe weather conditions in both January and February. The coal strike began to register an adverse impact on output in late February, but this influence is still relatively minor, and largely confined to Indiana. Some retailers are very pleased with recent sales, but others are not. There is evidence that consumers are holding back on purchases of autos and other big ticket items. Business capital outlays are expected to rise this year, both for equipment and structures. Demand for farm equipment is conspicuously weak. The long severe winter has hampered construction activity to an abnormal degree. Demand for credit appears to be strengthening, especially for bank loans to larger businesses. Interest rates are expected to move at least moderately higher as demand for credit increases while savings inflows to Thrift institutions remain slow.
Knowledgeable business managers in the district believe that the coal strike negotiations have been "bungled." The pact presented to the miners for ratification took away some benefits won earlier, and attempted to place unacceptable penalties on wildcat strikes. (These views come from management observers.) Nevertheless, a settlement is expected soon with various key sections rewritten.
All affected activities are expected to rebound after the coal strike is settled. However, the experience adds to inflationary pressures. Premium prices have been paid for substitute fuels, mostly imported. Costly adjustments in production processes have been necessary. The eventual settlement will entail a very large increase in compensation, which will stimulate demands in other industries.
Utilities in Illinois, Iowa, Michigan, and Wisconsin have not requested users to cut power usage. (Some companies have taken voluntary steps, however.) This favorable situation reflects extensive use of nuclear facilities, western coal, deliveries of non-union coal, and, in the case of Michigan, extensive purchases of power from Ontario. A utility serving 70 percent of Illinois' population reports that 46 percent of its sendout since January 1 has been from its nuclear plants. This company has activated some oil-fired peaking units in order to sell power to the East. Larger units used during the summer are out of service for heavy maintenance.
The electric utility serving Lake and Porter Counties in Indiana asked for a 15 percent voluntary cutback by the big steel plants and oil refineries located there. This request was accommodated by increasing self-generation, which normally supplies about 50 percent of the needs of these companies. Elsewhere in Indiana, industrial customers were cut back 25 percent, starting February 20. Commercial lighting was reduced drastically, and some schools closed. Industrial users have met the curtailment by added self-generation, stringent conservation, and, in some cases, by layoffs or 4-day weeks. It is believed that some companies are holding back on layoffs hoping that curtailments will soon be lifted. As of noon, March 13, further curtailments, perhaps to a drastic 50 percent, have not been ordered.
Layoffs directly related to the coal strike in this district, thus far, appear to be confined to Indiana. On Monday, March 13, the Indiana Labor Department counted 6,600 layoffs directly related to the coal strike, 5,400 indefinite and 1,200 for the day. The total is less than 1 percent of Indiana's manufacturing employment. A number of employers indicated that the situation could soon become more critical. The Indiana layoff total included 600 steelworkers involved in coke oven operations. Abnormally large stocks of coking coal had been laid down before the strike, including imports from Europe, but even this has proved to be insufficient. If coking coal does not begin to move to the steel mills in the next few weeks, output of finished steel will begin to be affected significantly.
One very large retailer reports that sales rebounded rapidly in all regions after the recent blizzards. Another retailer reports a much less vigorous picture. The first company reports that inventories are low, while the second says they are high. Both companies report added strength in apparel sales recently. Both report a decline in the ratio of credit sales, reversing the trend of earlier months.
Purchasing agents report renewed upward pressures on prices. As of April 1, Chicago area truckers are expected to apply for, and obtain, a 15 percent boost in rates. Wage scales will rise over 10 percent on that date, and costs of fuel, maintenance, new equipment, workmen's compensation, unemployment insurance, and other insurance have increased substantially since the last rate increase.
Farm equipment inventories are mounting despite reduced production schedules. Tractor inventories are the highest in seven years. To stimulate sales one manufacturer now offers a two year warranty on large tractors. Some dealers guarantee replacement of new equipment if breakdowns occur during a critical period.
A producer of materials expects a substantial rise in nonresidential construction this year. New orders for structural steel support this view. Home builders expect shortages of insulation and wallboard again this year.