September 13, 1978
The expansion in the Seventh District doubtless has slowed since the catchup period of lest spring, but there is no sign that a reversal is likely in the near future. Consumer spending continue to advance with rising incomes. Demand for workers remains strong and increases in compensation may be accelerating. There are few indications that inventories are excessive, and some items are in tight supply. Demand for capital goods is generally, but not universally, strong. Residential activity is holding up better than had been expected. Prospects for commercial and industrial construction are favorable. Corn and soybean crops are developing well.
Informed people are deeply concerned about inflation, the foreign trade deficit, high taxes, and high interest rates, but there is no evidence of a rush to the storm cellars. In September 1974, just before the sharp recession, there were significant signs that both consumers and businesses were holding back on spending decisions.
Local polls of consumer sentiment reflect the widespread pessimism reported nationally. There is no clear evidence, however, that people are restraining their desires for goods and services.
Retail sales remain vigorous, overall. The largest national retailer has been reporting very narrow volume gains from a year ago, but last year this firm was offering deep discounts to stimulate sales and profit margins were affected adversely. Among the products selling especially well are autos and light trucks, recreational equipment, TV sets, dishwashers, home remodeling items, and gasoline. In the non-retail sectors spending is very strong for air travel (helped by discounts), telephone usage, and insurance.
Consumer credit delinquencies are very low, below the best levels of 1972-73, despite some concern expressed earlier this year. In 1973 some deterioration in collections was already in evidence, and conditions worsened in the 1974-75 recession.
Demand for gasoline has been running well ahead of expectations in recent months. Refineries have been operating at 94-95 percent of capacity, which is "all out" for practical purposes. Gasoline stocks are low and prices have strengthened recently, in contrast to the usual post-Labor Day decline. No serious shortages are foreseen, however, because large additional supplies of gasoline can be obtained from abroad, although at higher average cost.
Demand for workers continues strong in most areas. Few layoffs have occurred in recent months. Strikes also have been relatively unimportant, except for the usual rash of teachers' strikes. Chicago City College teachers recently rejected a 7.5 percent boost (plus 3 percent longevity increases for most), and are demanding 12 percent. Increases this year by private employers have ranged from 7.5 to 11 percent with most concentrated in the 8-10 percent range. Union members and nonexempt personnel tend to get larger increases. Job offers to recent college grads were the best in several years, especially those technically trained, particularly women and blacks. Demand is especially strong for engineers, programmers, electricians, skilled metalworkers, auto mechanics, restaurant workers, office workers, domestics, and, as always, sales people.
The capital goods sector continues mixed but generally vigorous. Among the strongest lines are heavy trucks, rail freight cars, locomotives, machine tools, power shovels, heavy tractors, front-end loaders, farm equipment, small power generators, and diesel engines. Demand for electric motors, often a "leading indicator" for equipment, generally shows no sign that a "turn" is imminent. Demand for heavy mining equipment (shovels and draglines) remains slow, but inquiries suggest an improvement. Demand for electrical generating equipment for utilities is below expected levels.
Most machine tool producers have full order books with planned deliveries stretching into 1979 and beyond. Demand for very large machine tools, advanced technology tools, and automatic transfer machines are especially strong. Motor vehicle industry orders for downsizing new engines (both gasoline and diesel) and other components are a major factor, but all equipment producers are said to be "in the market."
The 10-day International Machine Tool show opened in Chicago September 6. The show will be the largest ever. Of the 1,000 exhibitors registered, one-third are foreign. U. S. producers fear that orders for imported machines will benefit because of shorter lead times.
Major producers of electrical generating equipment complain of a lack of sizable new orders. Partly this is because equipment produced for some utilities "in the last cycle" has not yet been installed because of construction delays caused by litigation and/or regulatory roadblocks.
A serious cement shortage developed in midsummer and has become steadily worse. "It's a crisis," according to one spokesman. Residential and commercial construction has been delayed as ready-mix producers have placed customers on allocation. The reasons are several: strikes at cement mills, problems with barge and rail transport, closing of older plants, and, of course, high usage. Nevertheless, a problem of this dimension had not been anticipated.