January 29, 1980
The Seventh District has been affected more than the nation by the slowing in activity. Further deterioration is expected. Output and sales of motor vehicles and recreational goods remain weak with no reversal in sight. Capital goods production, overall, probably has passed its peak. Wage settlements have been generous. Price inflation has not moderated, except for temporary bargains on items in excess supply. Except for depressed sectors, inventories are of moderate size in both manufacturing and retailing. The grain embargo has not had the adverse effect on prices that had been feared. Although mortgage terms have eased, the drop in the housing sector is still underway. Credit remains available, but at high rates, and with more careful screening of applicants. The crisis in Chicago's municipal finances appears more serious as additional information is forthcoming.
Although most of the information presented in this report is negative, total output, employment, and sales remain at high levels. Virtually nobody expects a broad, deep recession. Large order backlogs in some industries and a heavy volume of contracts for nonresidential construction will keep activity at high levels in these sectors into the second half of 1980. Moreover, except for a widely publicized case, there is little evidence of defaults on loans or other commitments.
Purchasing managers in both Chicago and Milwaukee (the major producers of capital goods) reported a significant deterioration in output, new orders, backlogs, and employment starting in December. Surveys of the outlook for the new year are the most pessimistic since December 1974.
Business leaders are deeply concerned about inflation. There is a widespread tendency to applaud the Federal Reserve's firm position, but without any conviction that the rate of inflation will slow significantly. The growing expectation that defense outlays will rise significantly has not had any impact on the outlook here. Military orders are a very small factor in this district. Moreover, there is no evidence that increased military orders will be forthcoming in the near future, and few companies are anxious to obtain such contracts.
Weather continues favorable, particularly in comparison with each of the last three years. There have been no problems with fuel, transport, or ability of workers to get to their jobs or to stores. As a result, January may appear more robust in year-to-year comparisons than is truly the case. Moreover, there will be no "bounce back" as the weather improves, such as occurred in each of the past three years.
The motor vehicle industry, centered in Michigan, continues to be the major problem area. Layoffs and plant closings, some temporary, have continued at the vehicle producers and their suppliers of components. Demand for tires, batteries, and other replacement items is also off. More dealerships have closed and there is serious concern that this trend will accelerate before the spring selling season.
Other industries hit by high fuel prices and concerns over availability are RVs, boats and motors, and restaurants. High beef prices have played a role in the poor results of some fast food outlets. Some have closed.
Steel shipments are expected to decline 3 or 14 percent this year, but activity may remain near current levels—about 81 percent of capacity. Except for motor vehicles, orders have remained at good rates. Customer inventories are low and lead times are very short.
Among the capital goods that have showed weakness starting in late 1979 are farm equipment, construction equipment, and trucks and trailers. Heavy backlogs for machine tools and railroad equipment appear firm for the time being. A number of producers of capital goods and other multinationals report foreign sales to be stronger than domestic sales.
Retailers had stocked ample quantities of warm clothing, galoshes, skiing equipment, snowblowers, and other winter goods. Sales of these items have been very poor because of the mild, virtually snowless winter. In recent weeks discounts ranging up to 50 percent have helped to move excess stocks.
Aside from the depressed items, retail sales are said to be relatively good. Credit has continued to be used freely with no significant increase in delinquencies.
The business slowdown has not caused unions to moderate their demands. The strike at International Harvester over mandatory overtime that started November 1 is still on, with no serious move by either side toward an early settlement. Oil refinery workers struck after turning down a 9 percent increase, but refineries can be operated for a long time by supervisory personnel. A Chicago news truck drivers' strike was settled for a 16.4 percent boost (retroactive) to $426 per week. Tank truck drivers settled for a 13.4 percent rise after losing a strike for a full COLA. Chicago teachers threaten to strike if the school term is cut to save cash. Chicago firemen also are threatening a strike to get a contract, despite generous compensation.
The grain embargo has caused a backup in the "pipeline" moving grain to the ports. The strain on transportation is giving way to underutilization. Corn Belt farmers and bankers had feared much lower grain prices. However, after the initial drop, prices recovered to pre-embargo levels. The large carryover of grain stocks resulting from record crops will continue to overhang the market, because no large orders are anticipated from non-Communist countries. Diversion of grain to alcohol production is strictly limited in the near term by the capacity of distilleries which is fully utilized.
District farmland values rose 2 percent in the fourth quarter, down from 6 percent in the third quarter, and the smallest rise since late 1977. At year end district farmland values were 14 percent higher than a year earlier, and four times as high as 10 years earlier.
Mortgage terms have eased somewhat. The going rate in the Chicago area on 20 percent loans is now 12 1/2 percent plus 2 1/2 points. Loans are readily available to good risks, but many potential buyers have pulled out of the market. S&Ls have been repaying borrowings in some cases. People desiring to sell homes have been advised to use land contracts, conditional sales, second mortgages, and other devices, but such transactions are not popular with sellers who wish to realize the full cash price.