January 31, 1979
The big story from the Seventh District is the weather, severe cold and unprecedented heavy snow concentrated in the Chicago area. Through December and early January business activity continued vigorous in the district. Businesses trying to comply with the wage/price guidelines find the rules confusing.
Although Wisconsin and Iowa have been afflicted, the focal point for bad weather has been the Chicago area with about 8 million people. Major roads leading to Chicago have been impassable for varying periods.
Temperatures far below zero put many trains and motor vehicles out of commission. Worse than the cold, Chicago has had over 60 inches of snow, 50 percent more than the normal average for an entire year.
O'Hare field with its heavy traffic of direct and connecting flights has been closed or operating on limited schedules. Travel and freight movements by road and rail also have been seriously impeded. A large steel company has been particularly hard hit. Chicago's mass transit system has been called a "rolling disaster" with many riders taking hours to reach their destinations or failing to arrive at all. A major trucking firm reports that freight movements to and from Chicago have been cut in half in the past two weeks. Absenteeism has ranged up to 50 percent on some days at some firms.
The Chicago area produces a wide variety of services, finished goods, and components. Also, components move through Chicago on their way to their destinations. These components are vital to other regions. The area has only one auto assembly plant, for example, but it makes many stampings and other components used elsewhere. We have heard reports that output in other regions has already been affected by reduced shipments from Chicago.
Retail stores, especially in the Loop, say business is down sharply. However, there has been a run on four-wheel drive vehicles, snow tires, batteries and other accessories. Attendance at sports events and trade fairs has been poor. Schools have been closed or have delayed reopenings.
Many roofs have collapsed, mainly lumber yards, stables, and retail stores—some of modern construction. Water damage in residential structures has been severe. Insurance companies have been swamped with claims. Many lawsuits doubtless will be filed. A booming business has developed in roof clearing and emergency repairs. No doubt the Chicago area will snap back rapidly once weather improves, and many will profit from the troubles of others. However, incomes of many individuals and firms will have been reduced while inflationary pressures will have received added impetus.
Reports from purchasing managers, trade associations, and business executives indicate that output, employment, and new orders continued to rise through December and into early January. Order backlogs suggest the expansion will continue at least through mid- year. Producers of railroad equipment and machine tools believe they will be operating at capacity for a year or more. Heavy trucks, construction equipment, and related components are backordered. Demand for autos and trucks remains vigorous, but output of less popular models has been cut back to reduce excess stocks. Inventories of most goods are moderate, and inadequate in some cases where cautious schedules of output have been followed. High carrying costs at present interest rate levels are often cited as a reason for keeping stocks lean.
Steel shipments from U.S. mills and abroad have been exceeding expectations. A large share of the imports are required to meet demand because domestic capacity is inadequate. One steel company is booking orders for April and May. Auto companies are ordering steel in line with announced production schedules. Nonresidential construction activity is certain to rise this year, with large office buildings and auto factory buildings leading. Builders and lenders expect a decline in housing starts ranging from 10 to 25 percent. Shortages of building materials, especially cement, are expected to continue to hamper activity throughout the year.
Many non-union employers, including banks, say they are following the seven percent guideline on wage increases. Some say they will review the matter at mid-year and grant further increases if the guideline is relaxed. Union bargaining is another story. A union leader says "it will be a turbulent year".
Increases in construction worker wages may be held to seven percent but there will be great pressure for more generous fringes, especially pensions and welfare. Construction bargaining deadlines are likely to be delayed as long as possible to see what's happening elsewhere. A trucking executive says flatly that the Teamsters will not settle for seven percent, but may get nine percent or more. Most unions are able to find some "tandem" relationship with another group that obtained a favorable settlement recently.
The guidelines for prices are even more confusing. Determining average prices and profit margins for large, complex corporations leaves much room for judgment. Accounting firms are pushing programs which they believe will help clients comply.
Most, but not all, professional forecasts for the general economy call for a moderate recession to begin in the third or fourth quarters. However, the typical executive expects his own business to avoid a slump. Conflicting views between forecasts of economists and executives have been noted in the past with no clear pattern as to which group was more accurate.