Beige Book Report: Chicago
March 11, 1980
Although the long awaited general recession still has not developed in the Seventh District, the automotive and housing industries remain seriously depressed with no promise of an early revival. Output of most types of capital goods is holding at high rates. Inventories are at very conservative levels, and a high level of new orders is necessary to maintain output and deliveries. Demand for workers has eased in most areas. Consumers have not reduced purchases of most types of goods and services. Price inflation has not moderated, and businesses have taken steps to protect their profit margins in anticipation of price controls. Credit markets are very tight with many smaller businesses complaining of the heavy burden of interest rates.
A sharp contrast exists among the industries of the Seventh District. Autos, trucks, recreational equipment, the airlines, and housing all suffer from severely depressed demand. And there is no sign that the situation will improve in the near future. Most other types of capital equipment and consumer goods and services, however, remain relatively prosperous.
The Chicago Purchasing Managers Survey for February, which covers 200 companies, shows 45 percent reporting higher output in February, compared to 15 percent reporting a decline. This reverses the downward drift reported in recent months. Overall, the report suggests stability in employment, output, and inventories. The Milwaukee report is similar.
Throughout the past year our contacts in manufacturing and retailing were telling us that their inventories were generally lean. These evaluations have been borne out by events. With final demand holding up for most items, there has been no room for substantial cutbacks in orders. Household appliances provide a dramatic example. Shipments had slowed in late 1979, but January showed a rebound with total unit shipments 11 percent above last year and close to an all- time record. Washers, refrigerators, freezers, and microwave ovens were especially strong.
Steel orders had declined in late 1979 and early 1980, but recent months brought a revival. A major Chicago producer will be operating at capacity again in March and April. Demand for steel is vigorous from virtually all customer groups, except for autos and trucks. Strength in steel orders is not believed to be related to scheduled price increases. Customers are buying steel on a hand-to-mouth basis, and they "admit" their inventories are low—an unusual situation.
Rebates are helping sales of less economical cars and light trucks somewhat, a temporary expedient that cannot be continued indefinitely. Even so, many 1979 models remain unsold. The market is extremely depressed for large cars, vans, pick-ups, four-wheel drives, and self-propelled recreational vehicles. Major parts' manufacturers have been notified of shifts in plans that will permanently reduce the use of frames, high horsepower engines, and related components. Sharply rising gasoline prices are influencing the pattern of demand for motor vehicles to a degree unforeseen only a few months ago. Because of a better product mix, General Motors has achieved a dominant position unparalleled in the past.
The capital goods picture is mixed. Demand for heavy trucks and trailers and most types of construction equipment is weak, while orders for machine tools, electronics, and energy-related items are very strong. Orders for castings are "erratic," but one analyst believes that the pattern suggests that capital goods, in general, have passed a cyclical peak. Freight car order backlogs are large, but a wave of cancellations may have started.
Nonresidential construction is threatened by a virtual drying up of new loan commitments. The office building boom is in high gear, and there is optimism that the new space will be absorbed rapidly. Important nuclear power projects in the district are moving ahead, but at a reduced pace. New regulations have drastically increased construction costs.
Home mortgage lending had begun to revive in February, but the recent jump in rates dealt a severe blow. With quoted rates now passing 15 percent major lenders report that loan applications, both for new and used homes, have slowed to a trickle. Some home builders and mortgage bankers have decided to cease operations in the Chicago area. Very few new rental units are planned. Given current construction costs and interest rates, a one-room apartment would require a monthly rent in excess of $600.
Consumer spending has held up well except for autos and tourism. Consumers respond well to sales and promotions. Credit delinquencies have increased significantly, but not, as yet, to an alarming degree.
The International Harvester strike that started November 1 is still unresolved. Allis-Chalmers was struck last week. Chicago firemen returned to work after a three-week strike, in which the issues were the right to strike and inclusion of chiefs in the union. Building trades workers in the Chicago area plan to demand wage costs of at least 15 percent to "catch up."
Employers are increasingly concerned about the effect of COLAs, both for union and non-union workers. COLAs often use local CPIs. While the national CPI was 13.9 percent above last year in January, the index was up 15.3 percent for Chicago, 15.7 percent for Detroit, and 17.8 percent for Milwaukee—19.4 percent on the CPI-W!
Rumors abound that price/wage controls, and/or selective credit controls, will be imposed, perhaps without advance notice. Anticipatory price increases are reported. Various steps are being taken to adjust pricing policies to protect profit margins if and when price controls are imposed. List prices may be raised and then discounted for the time being. Prices may be raised with temporary rebates. Coupons may be offered on food items, and then withdrawn at a later time.
High interest rates and reduced availability of credit are beginning to "bite" to a degree unprecedented in this cycle. Usury is no longer a major factor in mortgage loans, because high rates eliminated many potential borrowers. Auto loan ceilings are cited as a factor reducing the availability of loans in some states. In Michigan, hearings are being held on a bill to raise the 12 percent ceiling on indirect auto loans, which has virtually cut off this type of lending. The UAQ is actively opposing the legislation. We are receiving numerous complaints from smaller businesses that loan rates of 18 percent or more are driving them to the wall. Vehicle dealers are among the most vociferous.