July 12, 1978
Except for housing, virtually all sectors of the Seventh District economy are vigorous and there is no evidence that momentum is fading. Farm equipment sales picked up briskly in the second quarter. Employment continues to rise, and unemployment to fall, throughout the region. Consumer spending on goods and services has remained at high levels. Prices appear to be rising at a faster pace. Capital goods overall are trending upward. Rising nonresidential construction will provide an offset to the growing slowdown in residential construction.
Prices of goods and services are rising at a faster pace under the impetus of strong demand and rising costs of labor, transportation, utilities, insurance, and purchased materials. There has been no sudden surge in inflation, but rather a gradual acceleration with price increases posted more frequently than in the past.
Except for various building materials and certain special items, components and finished goods are available on normal terms. Delivery schedules have stretched out, but not to an alarming degree. Equipment producers, however, complain of long waits for large and special castings, as opposed to standard castings produced in quantity. Many smaller foundries have been closed in recent years, because owners were unable or unwilling to invest the funds needed to meet state or national EPA standards.
Retailers were pleasantly surprised by a surge in sales in the second half of June. Virtually all lines sold well for the month as a whole, including motor vehicles, appliances, home improvement items, and apparel. Consumers continue to use installment credit freely. One large retailer reports a moderate, but not serious, rise in delinquencies in recent months. Airline passenger traffic has been running about 15 percent above year ago with capacity loads on many flights. Cut rate fares have helped. A major telephone company reports net new installations of phones 50 percent above year ago, and message volume up 13 percent.
Employment in both the goods producing and service sectors has continued to rise at a surprising pace. Surveys of employers indicate further growth in hirings in the months ahead. Help-wanted ads in Chicago papers have been running about one-third above the year earlier level in recent weeks. Demand for executives is at the highest rate in a decade, according to a large recruiting firm. Many of these job openings are for engineers, accountants, tax lawyers, and others with highly specialized skills.
Recent contract settlements with construction trades unions in Chicago and Milwaukee have brought "moderate" first year increases in wages of 7 to 8 percent. Total compensation of electricians, iron workers, pipefitters, and operating engineers is now in the $15 per hour range.
While most firms are hiring new workers, some major companies are currently pressing programs to reduce white collar staffs to raise average productivity and improve narrow profit margins. Such cost- cutting programs have been instituted despite good gains in shipments and orders. Examples include producers of paperboard, capital equipment, chemicals, and furniture.
Backlogs of steel orders indicate a high level of shipments through the third quarter at least for most plants in the region. A growing share of shipments consists of plates and structurals used in capital goods. Steel companies were "shocked" at the continuing high level of steel imports in April and May. The effect of trigger prices is still uncertain. An overhang of inventories of imported steel in the distribution channels may prevent further price boosts, and possibly dampen domestic steel shipments in the fourth quarter. Chicago area plants are said to be the best situated in the nation to meet foreign competition.
Improving farm income prospects have encouraged farmers to spend more freely on equipment. Farm equipment sales had been very weak in the first quarter, but picked up in April, May, and June.
Demand for producer equipment, overall, has risen at a steady if unspectacular pace. Earth-moving equipment has been strong all year. Demand for commercial airliners, locomotives and freight cars, and heavy trucks and trailers is booming. The European "airbus," using many domestic components, appears increasingly attractive to US airlines because of its low operating cost. Delivery schedules for freight cars have stretched out to mid-1979. Shortages of freight cars are the worst in a decade, with priority given to grain movements. In part, the rail car shortage is blamed on bad management by Conrail. Very strong sales of heavy trucks currently may reflect, in part, diversion of traffic from rail to truck, and there are fears that a reaction may occur in 1979.
Residential building permits and sales of existing homes have been running 30 to 40 percent below year ago in major centers in recent months. Mortgage lenders have reduced new commitments sharply. Preliminary samplings indicate that S&Ls have gained a sizable net inflow of funds through sales of T-CDs, and this may improve the supply of mortgage funds. Little interest has been shown in the new 8-year notes. Nonresidential construction, especially commercial and industrial projects, is rising and the trend probably will continue into 1979.