November 15, 1978
Economic intelligence available in the Seventh District suggests that the general business expansion will not be halted in the near future either by higher interest rates or accelerating inflation. The President's inflation program outlined October 24. is viewed by most observers as being of minor significance. Some analysts are predicting a recession to start about mid-1979. Demand for capital goods remains strong. Inventories are generally in good shape. Job markets remain vigorous. Retail sales seem to be holding at a high level overall, but results vary by establishment and product. Mortgage credit has tightened further. Housing permits and transactions have declined in major centers. Farmers are prosperous and farmland values have increased further.
Economic forecasts for 1979 vary substantially. Some predict a continuing rise through the year, while others insist that a recession is "inevitable," probably starting around midyear. Some seek refuge in seeing a "50-50 chance" of a recession.
Comment on the President's inflation program has been surprisingly sparse. Executives willing to express themselves in public are laudatory for the most part. They promise "full cooperation," and say "Our company will follow the guidelines to the letter." These views probably reflect the belief that the rules are flexible and will not weigh heavily in decision making. Comments by economists and financial analysts are often more critical with some suggesting that the program, to the extent it is effective, will do more harm than good. Many observers fear that the rules are really mandatory, and will be followed by stricter formulations.
Executives in business and finance complain with some heat of the rapid growth of controls, despite assurances to the contrary, and the manner of their administration. The anti-inflation program is expected to result in added paperwork and loss of tine spent in "educating" federal monitors. The energy bill is judged to be difficult to administer without significantly affecting the supply and demand for energy either for better or worse.
Most producers of capital goods continue to report rising shipments, new orders, and backlogs. Various diversified producers report orders up 20 to 50 percent in September and October, greater gains than were achieved earlier in the year. Demand for farm and construction equipment has continued very strong and above expectations. Orders for castings, forgings, and types of steel used by equipment producers indicate further increases in output of producer goods.
Output of heavy trucks is at record levels, and the largest producer is "supplier limited." Demand for freight cars far exceeds capacity, and some believe no letup will occur in 1979. U. S. plants could produce 95,000 freight cars per year a decade ago, but only 65,000 now. Castings of various types are in great demand, and constitute a major bottleneck. Some producers of castings have activated expansion plans, a step that would not have been seriously considered until recently.
Some analysts believe that orders for both heavy trucks and freight cars are artificially high and that a reckoning lies ahead. Some believe this is true of capital goods generally. Nevertheless, various companies assert that they are controlling their backlogs carefully to keep out "water." Some do not include orders with cancellation clauses; some require stiff penalties in case of cancellations.
Inventories are not excessive and probably will not become so unless sales drop sharply. Companies insist they are watching the situation carefully. Inventories of farm and construction equipment are judged to be low. Petroleum products inventories are somewhat low, especially gasoline. Leaders of a strike of steel haulers that began last weekend (apparently to sever connections with the Teamsters) believe they will win because user inventories are tight. Even a large retailer whose sales have been running slightly below year ago, in contrast to the industry, says inventories are in line because orders to suppliers had been reduced promptly. Also supporting the view that inventories are lean is the recent stretchout of delivery times. The October report of Milwaukee purchasing managers (a preeminent capital goods town) shows 49 percent with longer lead times, compared with 18 percent a year ago. There has also been a significant rise in the proportion of these managers reporting poorer dependability on deliveries and lower quality.
Despite reduced sales reported by a large chain, total sales of general merchandise have been running 12-13 percent above year ago. Appliance sales have leveled off at about the year-ago level. TV sales have slowed recently. Consumers are spending more on nondurables, gasoline, and air travel. Credit use has remained strong with no rise in delinquencies. Sales of light trucks to consumers have been limited by capacity, especially four-wheel drive models. At least one major auto producer has shifted its production of cars away from larger models with larger engines to help meet mileage standards, regardless of consumer desires.
Home mortgage rates moved up to 10 percent and more in various areas in the past month. The impact of tighter credit is increasingly evident. Permits were down 21 percent in the Chicago area in September and 8 percent for 9 months. In the Milwaukee area permits were off 42 percent in September and 23 percent for 9 months. Transactions are also down.