May 16, 1979
Most observers in the Seventh District believe a slowing in total activity has already occurred. They believe that the second half will see at best a level trend in real GNP. One observer expects a decline in the fourth quarter at a 6 percent rate. Tight supplies of oil products casts a pall over the future, both near and longer term. Many business managers who accept this prognosis for the general economy expect their own industries to continue to operate at very high levels. Demand for most capital goods and their components continues to tax capacity, but there are a few signs of softness. Good workers are in short supply. Consumer buying appears to have leveled off with sales of low-mileage vehicles down sharply. The farm sector is prosperous, with credit demands substantial. Residential activity, both in new construction and transactions, is off sharply.
As far as we can determine, vehicle traffic in our district has not been significantly affected by gasoline allocations. Doubtless some auto trips have been deferred voluntarily. For May, the largest marketer in the district is allowing dealers 80 percent of their supply in May 1978. For a number of detailed reasons this is not nearly so severe as it seems. However, dealers have shortened hours, and some have limited purchases. A real test of the situation may not occur until the Memorial Day week end. Diesel fuel also is allocated for highway vehicles. Inventories of both motor fuel and heating oil are uncomfortably low. The basic problem is reduced crude oil imports with US firms refusing to bid the highest prices, partly because of federal pressure.
Lead times on manufacturers' new orders continued to lengthen in April. For some companies the main reason is inadequate transportation, both rail and highway. Equipment of the right type often is not available, on time and in sufficient quantity. Demand for heavy trucks, trailers, freight cars, and locomotives remains intense. A producer of heavy trucks placed a penalty on order cancellations after a certain date and was surprised that only 5 percent of affected orders were canceled. Freight car component capacity is being expanded, apparently on the belief that demand will remain high in the 1980s. The truck strike of early April and the more extended steel haulers' strike did not seriously affect activity in the district, although temporary disruptions occurred.
Demand for equipment for metalworking, materials handling, construction, agriculture, and logging has held up well. Longer lead times on certain equipment have caused customers to look abroad. Castings and forgings are bottlenecks for various producers. Foreign sourcing for such components has proved unsatisfactory in some cases. Heat treating and welding capacity is fully utilized.
Overall, capital equipment producers continue to report vigorous growth with rising backlogs. However, a producer of small drives and other components sold "off the shelf" says demand for these items, which led the expansion, has softened. Sales of oil exploration equipment have declined significantly. Producers of some types of coal mining equipment are operating well below capacity.
Some steel companies are booked through the third quarter. Orders for virtually all types are strong. Estimates of shipments for the year have been raised. Competition from foreign steel has dropped off as markets have strengthened abroad.
Although intermittent layoffs were associated with the truck strikes causing claims for unemployment compensation to rise, demand for experienced and trainable workers continues to exceed supply. As in 1973-74, foundries are ready to hire "warm bodies" for this rather disagreeable work. Through early May, help-wanted ads in Chicago papers have been running about 20 percent above the advanced level of a year earlier.
Retail sales have varied substantially by line and establishment. Credit use may have slowed somewhat, but large retailers report that delinquencies remain at a low level. A very large retailer has been reporting large declines in dollar volume from year ago with inventories on the high side. Increased promotions and price cuts are planned to boost sales. But other chains report sales to be at budgeted levels with inventories under close control. Prices of general merchandise, which had been rising at a rate of only 4 percent, are expected to accelerate to about 7 percent because of increases for petrochemicals, natural fibers, rubber, and leather.
Among the lines that have weakened are appliances and furniture. Fuel stringencies have depressed sales of recreational vehicles, power boats, and light trucks. Sales of four-wheel drive trucks, in short supply until quite recently, have declined precipitously.
Although seasonal problems are still difficult to sort out, both new residential construction and transactions in the resale market appear to be significantly lower than year ago. Only half as many residential building permits were issued in the Chicago area in the first quarter as in the same period of last year, with single-family homes down 58 percent. Total permits were slightly less than in the very depressed period of 1975. These comparisons may be somewhat improved in the second quarter because the January-February experience was "dismal." Single-family homes are staying on the market much longer than last year, partly because more offerings are available. Desirable condos are selling well at steadily rising prices. The going mortgage rate in the Chicago area has increased to a record 10.5 percent, plus two points for fees. Loans are said to be "available" at going rates, unlike the situation in earlier periods of tight money. Usury ceilings are not an immediate problem anywhere in the district, reflecting more flexible rules in certain states.
Sales of residential building materials, such as gypsum board and insulation, are still setting new records, partly because of nonresidential requirements. Ready-mix concrete companies are working full blast to make up for a long period of weather-enforced idleness during the winter. Order backlogs, in tonnage, are at record levels. Ready-mix companies are choosing jobs carefully, partly with an eye to the cost and availability of diesel fuel. Structural steel demand is strong, but is not at record levels.
Our survey of rural bankers indicates that District farmland values averaged 2.4 percent higher in the first quarter, and now exceed year-earlier level by 16 percent. The first quarter increase was one of the smallest increases since 1972.
Liquidity pressures are still very evident among rural banks, despite robust farm earnings in recent months. Demand for farm loans has been very strong. The first quarter rise in loan-to-deposit ratios was unusually large.
Interest rates charged on farm loans by rural banks have risen 1 percentage point in the last six months and 1.5 percentage points in the past year. Seasoned bankers say they cannot recall a period when rates on farm loans have risen so rapidly.