March 14, 1979
Except for housing, the economic activity in the Seventh District remains surprisingly vigorous. Sectors affected by heavy snows and low temperatures in January and February are recovering rapidly, but flooding in Illinois is a new problem. Job markets are strong. Consumers are spending freely. Price inflation has accelerated. Most capital goods producers report rising order backlogs. Inventories remain at moderate levels, but manufacturers are moving to increase inventories, especially materials such as steel and nonferrous metals. Order lead tines have lengthened further. Actual shortages of materials or components are rare, but output is pressing close to capacity. Barring some new oil crisis, fuel supplies are expected to be adequate but with prices rising substantially more than had been expected a few months ago. Housing permits and transactions are down substantially, but nonresidential activity is moving at a good pace. The farm sector is much healthier financially than a year ago. Soil moisture is more than adequate.
In recent months about 80 percent of purchasing managers in the district have been paying higher prices with virtually none paying lower prices—the worst picture since the fall of 1974. Most companies say that they intend to comply with the Administration's wage-price guidelines, but lack of compliance will be difficult to detect in the case of a firm with widely varied lines. Accountants, lawyers, and consulting firms are telling their clients that mandatory controls are a virtual certainty, perhaps as early as September. Prices are being raised frequently, at least list prices, so as to place firms in as favorable and flexible a position as possible.
Business firms in both manufacturing and retailing insist that their inventories have been low relative to requirements, uncomfortably so in some cases. Forecasts, frequently reiterated in the past 6 to 9 months, that a recession was imminent may have induced excessive caution. It appears now that restraints on inventory investments have been relaxed. A careful analyst of the metals markets believes that a "scramble for materials" is underway unequaled since mid- 1974. Most companies burning oil had laid in extra reserve supplies earlier this winter, as much as 3-month requirements.
Backlogs of orders for a broad spectrum of producer equipment have continued to rise. Included are construction equipment, farm equipment, heavy trucks and trailers, freight cars and locomotives, machine tools, diesel engines and other components, electrical and nonelectrical. Some of these producers fear that cancellations could be sudden and substantial, but there are no signs yet. A Chicago based conglomerate with diversified products for both consumers and producers recently reported "no sign of a recession in any of our divisions."
In February 57 percent of Chicago purchasing managers, a highly diversified group, reported slower deliveries, compared with 44 percent in January and 33 percent a year earlier, and the highest proportion since the summer of 1974. The situation is similar for Milwaukee where capital equipment predominates.
Demand for steel has been surprisingly strong with increases for structurals and plates as well as for light products. Order books are filling to midyear. One factor is the narrowing of the price differential favoring foreign steel. A leading Chicago area steel producer has taken the unusual step of asking customers to scale down or defer deliveries, but without success. Customer inventories are believed to be low, and deliveries are needed to maintain output. Steel shipments had been slowed by transport problems in January and early February. Other sectors with tight inventory situations include virtually all nonferrous metals, building materials, and paper. Large and special castings and forgings are the main bottlenecks for equipment producers.
Consumer buying appears to be reviving from the slump induced by severe weather. Restaurants and recreation spots were hard hit. Total auto and truck sales appear to be matching last year's fast pace. Four-year car loans are increasingly common, with no rise in delinquencies. The more popular small cars are selling very well, reminiscent of early 1974, at full list price or even at premiums. Demand for small four-wheel drive trucks far exceeds supply, obviously a consumer fad. Producers are taking steps to expand capacity substantially. On the other hand, some auto plants have cut output to control inventories.
A well-informed analyst believes that significant general shortages of petroleum products can be avoided this year without rationing. This assumes that Iran will ship at the indicated 3 million barrel per day rate and that other sources are not cut back. Spot shortages of no-lead gas are probable, but could be avoided by easing EPA standards on regular gas. Oil companies are not planning to boost refining capacity which currently is barely adequate.
The jet fuel "shortage" is not of great importance. The problem partly reflects unbalanced supplies regionally, and heavy use of "arctic diesel" in colder areas. There would have been no problem if the airlines had not been adding flights rapidly. The largest airline has dropped about 4 percent of its flights but departures are still 8 percent above a year ago. Capacity is still up 12 percent because of larger aircraft. Traffic was up 30 percent in the most recent week. Burgeoning free rides for kids are included in "revenue" passenger miles.