April 15, 1980
The Seventh District was hit disproportionately by the slump in motor vehicles and housing that began in 1979. Until recently, however, it was not clear that weakness was spreading to other sectors on a broad front. Now, accumulating evidence indicates that a general recession developed in the first quarter. Demand for most types of consumer and producer goods has been dampened, complaints from the rural areas have become strident, and nonresidential construction appears to be poised for a dropoff. Some observers detect an abrupt deterioration in their industries that began after mid-March. Finally, we no longer hear confident predictions that any general recession will be brief and mild. Confidence of consumers and executives has eroded noticeably, with no reversal likely in the near future.
Reduced availability of credit and high interest rates have become paramount considerations in decisions to apply for or grant most types of credit, not only for long-term residential and farm mortgages, but also for consumer installment loans, business working capital loans, and farm production loans. This phenomenon has not been apparent since WW II.
Conservative policies on carrying inventories and booking orders (in contrast to 1974) may have prevented a general recession from developing in 1979. In a number of industries—e.g., steel, appliances, and equipment components—order trends have followed an irregular path as periodic reordering has been necessary to maintain adequate working stocks. Similarly, the absence of multiple ordering prevented waves of cancellations when demand slowed. But inventories and bookings never appear conservative when demand declines sharply or is expected to do so. In late March a number of industries, e.g., steel and petrochemicals, experienced a sharp drop in orders. Reduced backlogs and shorter order lead times were reported widely.
Favorable weather this past winter in contrast to the last three may have made the economy appear stronger in early 1980 than was the case. Road and rail transportation and construction activity were affected less by weather this winter than in a normal year.
The industrial developments in the district have been confused by the aftereffects of strikes at Deere and Caterpillar late last year, and by the continuing strike at International Harvester that began November 1. The strikes have made demand for the products of these companies appear artificially strong because of the reduced flow of finished products.
Most producer goods industries report declines in demand, although in varying degrees. Production is being maintained in some cases, but backlogs typically are declining. Hardest hit have been trucks, trailers, farm equipment, and types of construction equipment associated with residential developments. Orders for freight cars, diesel engines, mechanical components, and castings are down sharply. Still strong are machine tools, various electrical equipment, and commercial aircraft—all represented to a degree in our district.
Demand for most types of domestic cars and trucks remains weak, resulting in further cutbacks in output schedules. Layoffs have increased again at the Big Four, at parts suppliers, and at dealerships. Sales are down more in this region than nationally.
Closings of auto dealerships, often large agencies handling the strongest names, are increasingly frequent. Aside from depressed sales, dealers have been carrying inventories at interest rates ranging up to 20 percent. Interest alone averages $150 per car per month, and many higher-priced cars remain on hand for abnormally long periods. Also, some of the agencies occupy modern facilities with heavy mortgages.
Large general merchandise retailers headquartered in the district reported March sales in current dollars at or below last year despite an earlier date for Easter. Prices average about 7 percent higher. Weakness was noted in all major lines, and in all regions. Credit delinquencies have increased, but not to an alarming level as yet. However, bankruptcy filings are building up rapidly, encouraged by last year's lenient bankruptcy act.
Installment credit has been under increasing restraint for six months or more at banks (including bank cards), credit unions, and retailers. Outflows of deposits, usury ceilings, and operating losses on consumer loans have caused lenders to take one or more of the following steps: refusal of new lines and increases in existing lines, withdrawals of existing lines, raising of standards, increasing minimum payments, and changing methods of calculating interest.
Housing activity, both new construction and transfers, is at a virtual standstill in most areas of the district. Permits for new homes in the Chicago SMSA in the first quarter were at least 80 percent below two years ago, and many of these permits may not be activated. Residential developments continue where loan commitments were made last year at favorable rates. Posted loan charges are 17 percent plus three points, but very few new loans are being made. Usury rates have not been a factor because huge monthly payments required currently price virtually all borrowers out of the market. Some analysts believe that fixed rate mortgages may not be offered in the future. Transfers of existing homes usually reflect situations where people must move, and are ready to make substantial price concessions.
Economic conditions in the district's farm sector have deteriorated significantly since mid-March, an abrupt change for the worse rarely matched in the past. Deep concern reflects lower commodity prices, reduced credit availability, and unprecedentedly high interest rates. The squeeze on farm profitability evident in earlier months has tightened. The terms "panic" and "distress" are encountered frequently in the local press and in our contacts with rural communities. Because of liquidity pressures, rural banks are policing farm credits more closely. Some borrowers have been turned away, and others have been restricted to amounts needed to get crops underway, with a clamp down on loans for equipment and capital improvements. Purchases of farm equipment are down sharply. Buyers of grain and livestock, also affected by tight credit, have scaled down purchases to hold inventories at minimum levels. A preliminary tabulation of our farmland survey shows prices down moderately in the quarter ending March 31, and observers believe that the downtrend has accelerated. Tight credit and bleak farm income prospects have had the double impact of reducing the number of potential investors and increasing the number of properties offered for sale.