March 25, 1981
Summary
Economic activity in the Seventh District is unlikely to
show any marked change, up or down, in the months immediately ahead.
However, large gains for the second quarter will be reported for
many sectors, e.g., autos and steel, in comparison with the same
period of 1980 when sharp declines occurred. Some sectors report a
moderation of price inflation, but there is little hope for a
slowing in worker compensation. Many analysts hope for real gains in
the second half, assuming that credit conditions continue to
improve. In general, capital goods demand is weaker than consumer
goods demand. Businesses are keeping inventories very lean.
Construction activity remains severely depressed but there has been
some revival in home sales. Many businesses, consumers, and
state/local governments are grappling with financial problems. Farm
income forecasts have been adjusted downward.
Inflation
Significant price reductions are reported for cement and
ready-mix concrete. Prices of gypsum board and gasoline are soft.
Increases for general merchandise and some components have
moderated. Most auto insurance rates will not rise this year.
Despite these favorable signs, purchasing agents expect average
prices to rise 9-11 percent in 1981. Labor costs are not moderating
overall. Further substantial increases in transportation costs and
utility charges are inevitable. Chicago area mass transit fares rose
by one-third at year end and a further rise of 25 percent is under
consideration if state subsidies are not arranged.
Labor markets
Entry level jobs are probably harder to find in this
region than at any time since the years before World War II. Help-
wanted ads in Chicago papers are running 40 percent below last year,
and volume is dominated by ads for programmers, accountants, various
other skills, and commission sales people. The job situation
reflects generally poor economic conditions, closings of obsolete
facilities (especially in inner cities), increasing automation, and
hiring cutbacks by state/local governments. Despite weak demand for
workers, compensation rates continue to rise. Labor demands in
current negotiations have not moderated, and attempts to renegotiate
existing compensation packages are given little chance to succeed
except in cases where unions are convinced that facilities will be
closed if concessions are not granted. In the public sector,
Milwaukee firemen recently won "parity" pay with police after a
strike. The police union immediately asserted its aim to restore a
differential in its favor.
Consumer expenditures
Major retailers report a gradual improvement
in general merchandise sales in February and March. Special
promotions (encouraging "cherry picking") and mild weather have
helped. Credit sales are still lagging. Delinquencies and writeoffs
of credit are "bad" with the new bankruptcy law a big factor.
Microwave ovens are the only really strong household appliance.
Airline travel is down 15 percent from the 1979 peak with advance
bookings showing no improvement. Hotel occupancy rates have declined
in Chicago, partly because of reduced convention business.
Motor vehicles
The auto rebate program was very successful. Some
dealers reported that sales doubled during the period when rebates
applied to the most popular models. However, sales dropped sharply
on March 20 when the rebate program was sharply curtailed. Rebates
did not apply to truck sales and they remained severely depressed.
Sales are still expected to revive in the second quarter, helped by
new models (especially GM's J-car), and pressure of pent-up demand.
Floor plan rates were recently cut to 18.75 percent, down from a
peak of over 22 percent, but still high enough to keep most auto
dealers in financial trouble. Many dealers are said to be close to
the point of deciding on liquidation. Used car prices are strong,
largely reflecting the low rate of new car sales.
Steel
Steel demand is showing surprising strength in virtually all
markets. Second quarter shipments will be well above last year. A
leading district producer will be operating close to capacity. The
auto industry is ordering steel in line with increased production
schedules. Recent increases in "trigger" prices have caused some
foreign steel producers to close their sales offices here.
Capital goods
Orders for business equipment remain at depressed
levels in real terms, barely sufficient to keep plants operating at
current reduced rates. One diversified capital goods producer, which
had enjoyed surprising strength in new bookings in January, reported
that February business fell back again. Rail equipment output is
falling rapidly. Retail sales of heavy trucks and trailers slipped
in the fourth quarter and remained at this reduced level in early
1981. Orders for heavy castings are at about 60 percent of capacity.
Construction equipment demand is still very weak, but two closed
plants have been reopened on a limited basis because of depleted
inventories. Some leading producers will not exhibit at the
materials handling show, to be held in Chicago in April, for the
first time in memory. Farm equipment is mixed, but generally soft.
Oil and gas development equipment is one of the few capital goods
sectors reporting vigorous demand.
Real estate
Residential construction is not reviving, despite some
pickup in transactions in existing homes. Nonresidential
construction is also weak, except for the Chicago Loop area where
new buildings are still leasing briskly. S&Ls are quoting mortgage
rates in the 15.5 to 18 percent range, plus three points, and plus
fees of $100-$300. But few regular loans are being made.
Transactions frequently involve loan assumptions, contract sales,
second mortgages, or some combination of features. GPMS, SAMs, and
RRMs are also part of the picture. Some insurance companies are
offering commercial mortgages again, often with equity
participations.
Agriculture
Farm prices remain at lower levels than analysts in the
area had anticipated. Current estimates for farm exports and farm
income suggest smaller gains than had been indicated earlier.
Livestock producers, particularly, have seen profit margins cut by
the cost-price squeeze. Upward pressures on retail food prices have
eased. High interest rates and disappointing earnings prospects have
dampened capital outlays by farmers.
Finance
Liquidity of S&Ls has improved, but many are facing erosion
of net worth and are extremely cautious in making new loans.
Business loan demand from district businesses reflects the depressed
state of activity here, but some large banks have increased loans
rapidly by participating in syndicated loans, especially to energy
companies. Financial stringency of business, especially small firms,
is indicated by the fact that the number of firms delinquent in
paying Illinois unemployment taxes is double the level of three
years ago.