August 9, 1978
Activity in the Seventh District apparently continued to rise in the summer, allowing for plant-wide vacations, and other seasonal developments. Employment and retail sales remain vigorous. Inventories are generally in good balance, and procurement problems are minimal for most businesses. Prospects remain favorable for overall growth in capital spending. Although shortages are infrequent, important sectors are operating at virtual capacity, and there is little overall slack in the economy. Housing appears to have been much less affected by tight credit than had been feared. Crops are developing at an excellent rate. Farmland values increased substantially in the second quarter.
A frequently expressed view holds that a recession will begin late in 1978 or early in 1979. Little or no evidence of current weakness is offered to support this position. In fact, a number of sectors are doing better than had been expected a few months ago, including housing, steel, paperboard, retail trade, transportation, and agriculture.
Consumers are using credit liberally to buy goods and services. Retailers who follow developments very closely find no evidence that delinquencies have increased. Airline travel continues at a "phenomenal" pace with July 18 percent above year ago. Credit card travel is up 35 percent.
Except for special castings and certain building materials, there are few serious procurement problems. Nevertheless, there is not much slack in the general economy. Competent workers are hard to find, and job hopping is on the rise. The railroads, truckers, and airlines are operating at or near capacity. Order backlogs for transportation equipment of virtually all types are up sharply. Other sectors operating at virtual capacity include machine tools, construction equipment, paperboard, aluminum, oil refining, cement, gypsum, and, in the case of one major producer, steel. The failure of basic industries to expand, or even to maintain capacity in recent years, may preclude faster growth.
A freight car producer booked a record volume of new orders in the second quarter. Demand for heavy trucks and trailers has been at or near record levels, partly because of diversions of traffic from rail. At one plant producing heavy trucks, 1,000 workers continued to work during the plant-wide vacation to finish units in need of special work.
Reports that steel orders had slipped in early July proved to be unfounded, except for oil country goods where inventories had been boosted by a 50 percent rise in shipments in the first half. Demand is broadly based. One analyst reports steel demand this summer to be the strongest since l974.
Forecasts of 1978 sales of cars and trucks have been raised recently. Sales of cars and light trucks are expected to be about as large next year. Heavy truck sales, however, are expected to decline from current "artificially" high levels.
Large S and Ls have been using T-CDs effectively to stanch the outflow of funds. Mortgage rates have leveled off in the 9.75 to 10 percent range. Transactions in existing houses have held up well. There is no significant overhang of unsold new housing units, as in l973-74. In fact, many builders are behind on completions because of shortages of materials, and (more frequently mentioned now) skilled labor. Residential permits for the Chicago area were above year ago in June, after pronounced weakness in earlier months.
The City of Chicago's sale of tax-exempt bonds for relending on properties in the city has been hailed as a useful step to arrest urban decay. However, less than $100 million has been raised, and mortgage volume in the city exceeds $1 billion annually. Mortgage funds offered at 8 percent were quickly absorbed by a swarm of applicants.
Prospects for commercial and industrial buildings are favorable into 1979. Orders for fabricated structural steel, construction contracts, and announced plans support this view. Thirteen large office buildings and four expansions are underway, or definitely planned, for Chicago's downtown area. These projects would add 12 million square feet of space, or 20 percent, to the inventory. Vacancies are very low in high-grade structures.
Despite a late start, corn and soybean crops are developing nicely throughout the district. If estimates of large yields prove correct, storage facilities will be inadequate because much of the 1977 crop is still on hand. With higher prices for crops and livestock, the prosperous farm situation is in sharp contrast to the conditions that brought on the "farmers' strike" last winter. Farm equipment sales have picked up dramatically, and production schedules have been raised. Loan repayment problems at country banks have improved further, especially in Iowa. (Delinquencies on equipment loans by captive finance companies had not increased significantly at any time.) Our survey of country bankers shows average farmland values rising 4 percent in the second quarter to a level 8 percent above year ago. The rise in farmland values is especially marked in Wisconsin where purchases for nonfarm purposes are relatively more important.
Virtually all manufacturers took scheduled plant-wide vacations in July and August, despite rising backlogs in some cases. Plant shutdowns are so widespread as to hamper analysis of underlying trends. Managers frequently take vacations at the same time as the plant work force.