Beige Book Report: Chicago
March 23, 1983
Summary
The economic atmosphere in the Seventh District has
improved substantially since the turn of the year. This is the first
time such a statement could be made unequivocally since the region's
deep problems became manifest in the spring of 1979. Virtually all
sectors have seen improvement or at least an end to the declines of
the past year and a half. Orders have increased for building
materials, steel, nonferrous metals, appliances, paper, paperboard,
and various components. Retail sales of general merchandise have
improved moderately and airline traffic is booming in response to
bargain fares. Order leadtimes have lengthened and wholesale prices
have increased for a broad range of hard and soft goods. However,
demand for capital equipment remains very slow. Employment, overall,
appears to have stabilized, but there is little hope for a
significant near-term increase.
Caution Remains
Signs of better times should be kept in
perspective. Improved sentiment largely reflects a feeling of relief
that the long decline has halted, and perhaps reversed, without the
wholesale bankruptcies that some had feared. The entire region
remains very depressed. The view is spreading that the problems of
the Midwest are chronic, not just the result of another "cycle."
Moreover, aside from residential construction and defense (a minor
factor here), much of the improvement since December is associated
with the aftermath of the rapid inventory liquidation of 1982,
especially the fourth quarter. No general resurgence in final demand
is anticipated in the near future.
Business Confidence
Various surveys of business sentiment indicate
improvement, but this may reflect more a feeling of relief that "we
made it" through the crises than renewed confidence. Strength in the
stock and bond markets has permitted many companies to greatly
improve their balance sheets, and ruthless cost cutting has lowered
breakeven points. But debt burdens remain high and most executives
are very hesitant in making commitments. An "aversion to risk
taking" is evident, to a degree unknown since World War II.
Purchasing Managers' Reports Favorable
In their February reports,
purchasing managers associations in Chicago and Milwaukee showed
gains in orders and output for the first time since the spring of
1981. Also, voluntary inventory liquidation appeared to have ended.
However, reports of declining employment continued to outnumber
reports of increases. Perhaps the most striking development was a
sudden surge in prices paid. Since early 1982 these reports had
shown prices declining on balance, an unprecedented development
since World War II.
Wholesale Prices
Increases in prices are reported for steel, steel
scrap, aluminum, copper, brass, nickel, silver, gypsum board,
cement, lumber, building hardware, paper, and paperboard. Only oil
products and petrochemicals have continued to decline. In many
cases, earlier declines in prices and recent increases were effected
by adjustments of discounts from list that will not be recognized
fully in official indexes. Fierce price competition and very short
leadtimes have reflected excess capacity and very low order books.
Inventory policies, geared to immediate availability of goods and
soft prices, are being modified as these conditions are reversed.
Consumer Purchases
A very large general merchandise chain reports a
modest improvement in demand. Inventories are somewhat slim. Retail
prices average only 2.5 percent above the year-earlier level, but
may be firming. Airline travel in February and early March was at
least 10 percent above the year-earlier level, and at a new
seasonally-adjusted high. The surge in air travel was encouraged by
bargain fares, 12 percent below last year in February.
Employment
In January, payroll employment in the district was 9
percent below January 1979. Nationally, employment was about the
same as four years earlier. In the same comparison, manufacturing
employment was down 27 percent in the district, about twice the
deficit nationally. It is unlikely that job markets will improve
significantly in the months ahead. Help-wanted ad volume in Chicago
in February and early March was 25 percent below the year-earlier
level, and 60 percent below the 1960 base. Conditions in other large
district centers are similar. Many employers will attempt to handle
any improvement in business without new hirings. Severance of newly
hired workers can be costly, especially if government regulators or
private litigation become involved.
Capital Goods
The outlook for capital equipment produced in the
district remains bleak. A slight rise in sales of small backhoes
used in homebuilding is the only improvement in the construction
equipment sector. Logging equipment is also up modestly. If the
Caterpillar strike (now almost six months old) is settled, output of
earthmoving equipment and related components will rise. Large
inventories on hand when the strike began have been depleted. Hopes
for a revival in farm equipment have been dashed by the government's
acreage reduction programs. Rail equipment demand has dropped to the
levels of the 1930s. Some orders for trucks and trailers were placed
to beat the April 1 tax hike. Machine tool order backlogs have
virtually evaporated. This industry, described by its leaders as
"severely crippled", is seeking protection from imports. Contracts
for factories, warehouses, and commercial structures indicate a
further decline in nonresidential construction.
Autos
Sales of autos this year have not been strong enough to
justify planned production schedules, which may have to be cut back.
However, some analysts point out that a growing share of auto output
is for individual orders. Orders are not counted in reported sales
data until deliveries are made to customers.
Steel
Orders for steel have risen sharply since year-end, but only
for lighter products required for autos, appliances, and housing.
Heavy structurals and plates remain very weak. Order leadtimes on
sheet steel, near zero in January, are now out three months, a
situation that may cause some users to order still further ahead.
Housing
The housing upswing has considerable momentum. Large
district realtors report that transactions for existing homes in
January and February set all-time highs for those months. Contracts
for new residential construction in January in the Chicago area were
almost double the low level of last year. Repair and remodel work
may be at new peaks. Some gypsum plants are operating six-day weeks
with output above rated capacity.