October 14, 1980
Activity in the district apparently strengthened moderately in the past two months, but remains well below the levels of either the first quarter or last year. No substantial revival is expected for the next several months. Consumer buying is sluggish. Capital spending, overall, is in a downward phase. Inventories are lean and under tight control. Wholesale prices are strengthening again after a brief period of discounting last summer. Housing remains severely depressed. Farm income prospects have improved. Credit is generally available, but high rates and tighter lending standards hold down new credits. Complaints of "slow pay" by businesses and consumers are widespread.
Purchasing managers in Chicago and Milwaukee report that the modest improvement they noted in August continued in September. For many companies, however, this means merely a slower rate of decline. Some uptrend in orders, output, and employment has occurred, but activity remains well below the levels of the first quarter. Prices paid are strengthening again.
Retail sales
Retailers report that sales were somewhat
disappointing in September and early October, following an
improvement from the low point of April-May. Price cutting and
special sales are common. Except for strength in auto parts and
service, no categories are singled out as particularly strong or
weak. Credit use has revived, but customers are using their lines
cautiously. Delinquencies continue to rise, but not alarmingly.
Retail inventories are definitely lean, so a strong Christmas
season, should it develop, would cause some stockouts.
Airline traffic has been declining for several months. In September passenger miles on trunk airlines were 13.5 percent below year ago. Advance bookings and customer surveys suggest the picture will weaken further. The recession and higher fares, up 14.0 percent on full-pay tickets, are blamed.
Autos and trucks
Motor vehicle sales were slow in September, partly
because of depleted inventories of large cars. No clear reading on
the strength of demand for 1981 models will be possible until late
October or November. New models appear to be selling well, but high
prices shock some potential buyers. Inventories are in much better
balance than a year ago at this time. Most dealers have moved out
stocks of big cars and consumer-type trucks. Rates on car loans have
stabilized in the 14-16 percent range. Credit is available, but
lenders are very selective on new credits, especially on 42 and 48
month loans. Finance companies are now charging over 14 percent on
floor plan loans, and dealers are complaining bitterly. Dealers are
determined not to overstock again, partly because they fear that
carrying costs, subject to change day-by-day, will increase further.
Dealerships continue to close as losses accumulate, but not as
frequently as last spring. Captive finance companies have
reestablished some closed dealerships under new managements.
Showroom traffic to view new models generally has been
disappointing, partly because new features are not apparent in
styling. There is little hope for a substantial revival in vehicle
sales in the next 3 to 6 months. Sales are especially weak in
Chicago, and the Midwest generally.
Capital goods
Overall, new orders for equipment are continuing to
decline, and backlogs are still eroding, but at a slower rate. There
is no evidence of heavy cancellations of orders as in 1974-75. The
oil and gas sector and machine tool builders have large backlogs.
Demand for farm equipment and heavy trucks shows some improvement
after a sharp decline earlier in the year. Construction equipment is
in its worst slump ever. Orders for heavy castings have stabilized
at a rate equal to about 60 percent of capacity. Freight car
deliveries are declining at an accelerated rate.
Steel orders have improved since early July. Operations have moved from a low of 50 percent of capacity to about 75 percent, but remain well below the levels of 1979 or early 1980. Some laid off steel workers have been recalled, and closed furnaces have been started up. Lead times on sheets have returned to normal, but leads on most other products remain short. Steel inventories at all levels have been low for the past year, which explains the up and dawn nature of steel demand.
Housing
Residential construction activity is at a postwar low in
most district centers. An incipient revival in the summer was
aborted in August as mortgage money tightened and rates moved back
past 12 percent. Currently, most posted rates range from 13 to 14
percent plus fees of 2.5 to 3 points. Some lenders offering 13
percent loans say there is no need to go higher because demand has
"dried up." The failure of builders to get "holes in the ground"
this fall will slow the seasonal uptrend in activity next spring.
Used house sales also remain at a low ebb, with most realtors down
to skeleton crews.
Nonresidential construction is at a high rate, but is expected to decline in 1981. A large volume of work is in the planning stage, with contracts expected to be let some months hence. Financing will be a problem unless the insurance companies return in force to the commercial mortgage market which they largely closed off in late August.
Agriculture
Crop prices have declined somewhat, and livestock
prices have leveled, but farm income and credit remain healthier
than was the case early in the year. Corn and soybean harvests are
ahead of normal. Recent frosts were light and did not significantly
alter yield forecasts. The Wisconsin dairy industry has been
relatively prosperous. It will be strengthened further by the
semiannual adjustment which raised the milk support price to 14
percent above last year as of October 1.
Inventories
Businesses of all types are striving to keep
inventories low, partly because of high financing costs. Only oil
product inventories are deemed excessive, but this would be a
stabilizing factor if the Iraq-Iran war drags on or spreads.