August 9, 1972
In the past month the Seventh District has witnessed a further strengthening of confidence in the vigor and duration of the economic uptrend. In part, improved sentiment reflects the substantial increases in profits reported for the second quarter by many firms. In addition, order backlogs have been rising for most firms since early spring, and delivery times have gradually stretched out. In a growing number of cases inventories are increasing, or are expected to increase, to support the sustained growth in activity. Employment is rising in most centers and unemployment is declining—but these trends are gradual. Demand for business loans and most other types of credit is strong, and interest rates, especially short-term rates, are expected to increase moderately from now until year-end.
For the past six months groups of purchasing agents in major centers have reported increasing orders and order backlogs, higher production, and slower deliveries. In the past three months more firms have been reporting higher employment and larger inventories. More than half of these firms have been paying higher prices and reports of lower prices are rare. These reports suggest that price inflation is about as serious as last year, but not as bad as in 1970 or 1969.
Air conditioners apparently provide the only example of merchandise in excess supply. Inventories of other appliances are well above last year, but are about in line with sales. Auto inventories are relatively low. Producers of some capital goods and capital goods components are beginning to plan inventory increases as delivery times have lengthened.
Various types of lumber are in short supply. Some builders have substituted gypsum and fiber board for plywood because of high prices, but these products are on allocation.
It is clear that auto producers are very pleased with the situation of their industry, including the slide in sales of imports. Output of 1973 models will rise rapidly, because stocks of 1972's will be low relative to sales when new models are introduced.
The truck market continues to exceed expectations, and sales of 2.6 million trucks are now believed to be a certainty for 1972. There is no sign of any slackening in demand.
Some producers of heavy construction equipment maintain that this market remains slow, but there are contradictory reports that sales of these products are very strong and that output and employment will have to rise.
Producers of capital goods components—bearings, drives, and controls—report the continuance of a rapid expansion that began, in some cases, a year ago. The upward trend in machine tool orders in the past six months has been dramatic, but experience of individual companies has shown marked differences.
Some industries—notably residential building materials and petroleum—have been reluctant to increase outlays for plant expansion despite high operating rates. Incidentally, complaints about price controls are most vigorous in the case of the petroleum industry. In most other industries the effect of controls on profit positions appears to be neutral overall.
Steel order trends are favorable, including demand for "light structurals." New heavy construction work is slow, and demand from producers of railroad equipment has not increased. The agreement to restrict imports apparently is working well in the case of nations that are included in the agreement, but imports from nations not covered have increased.
Sales of consumer goods of most types are strong. Customers are using credit freely, but delinquency experience has improved. Most retail trade analysts in this area have become increasingly disillusioned with consumer surveys as aids to predicting consumer behavior.
Residential construction activity has continued at a high level in the Chicago area, but permits for apartment buildings have fallen below last year's very high level. In some areas, notably Detroit, home building has been hurt by adverse experience with subsidized mortgages.
Crop conditions in this region, for both corn and soybeans, are good to excellent. Cattle feeders, despite higher profits, are displeased with the proposed restrictions on hide exports, and the proposed ban on the use of DES, a growth hormone. Prices of "good" farm land were 3 percent higher than a year ago in July, according to reports of rural bankers.
Some banks found that savings inflows were significantly lower in recent months as compared to the early months of the year. In the case of S&Ls, however, savings inflows rose again in May and June after slowing in April. About two-fifths of the new money obtained by S&Ls is in the form of 6 percent certificates. Their loan commitments are heavy.