The economic situation in the Seventh District continues to show marked contrasts. Most capital goods producers report further increases in backlogs. Problems of shortages have eased somewhat, partly as a result of rationing by higher prices. Consumer demand for some appliances and furniture has softened. Residential construction is at a very low ebb, with no prospects of a revival this year. Strikes are hampering output in a variety of activities. Price and wage inflation appears to be accelerating. The most significant adverse development of the past month has been the substantial deterioration in the outlook for the corn and soybean crops.

Electric utilities and auto companies are slowing their capital expenditure programs, mainly because demand for their products has fallen below expectations. Such decisions do not seem to have moderated the extremely strong demand for virtually all types of machinery and equipment. Some machine-tool producers are not taking additional orders for lead-time items because of pricing uncertainties. Perhaps demand is most intense for railroad equipment and mining machinery. Some freight care producers are booked through 1975. A major producer of mining machinery has embarked on a three-year program designed to more than double its capacity.

Reduced activity in some sectors and the rapid rise in prices since decontrol have eased supplies of some items. Fuel supplies are ample at current prices, and "absolutely no" shortages of any major petroleum product are expected to develop through the remainder of 1974. Paper also is more available at prices 20 to 25 percent higher. Electrical components for consumer goods may be in excess supply. On the other hand, there has been no letup in demand for steel or aluminum and many other materials. Complaints about slow deliveries of axles, transmissions, brakes, bearings, diesel engines, castings, and forgings continue. Because of failures of suppliers to meet delivery schedules, some companies are pushing programs to become more self sufficient.

We have not found evidence of a general buildup of excessive inventories (although there are many imbalances), but a significant decline in total business activity would soon cause such a development. For the present, most firms appear to be increasing inventories according to plan or the degree of availability of the items they purchase. High interest rates and limited availability of credit have caused some firms, especially smaller ones, to limit inventory investments and capital outlays.

Strikes have been significant in holding down construction activity and output of motor vehicles and various types of equipment. By far, the most serious strikes in the District was settled on July 22 when cement truck drivers in the Chicago area resumed work after a nine-week strike that had halted a large part of all construction activity in seven countries. First-year wage increases of 10 to 12 percent or more are common, with or without strikes. The main factor delaying conclusions of some labor negotiations has been a failure to agree on cost-of-living adjustments clauses for future years.

The residential construction situation is miserable, In June, building permits for new dwelling units were off 70 percent from last year and the six months' total was off over 50 percent. Permits for homes in the Chicago area were lowest for any June since World War II, and permits for apartments were the lowest since 1956. (Permits in the Milwaukee area were off over 40 percent for six months.) The Illinois usury rate was belatedly raised from 8 percent to 9.5 percent in July, but this is not expected to help much because of the impact of high money market rates on the availability of mortgages. Proposed new developments of both residential and commercial projects are said to have "dried up". Financial stringencies reflect the problems of real estate subsidiaries of insurance companies, banks, and manufacturers in obtaining funds, as well as the plight of the savings and loan associations. Large Chicago savings and loan associations reported a net outflow of savings in July for the fourth straight month and a record outflow for any month. Demand for housing continues strong, with vacancy rates reduced, rents rising sharply and prices of existing homes holding steady or rising further.

Heavy rains earlier in the year, followed by drought, have drastically altered the prospects for the corn and soybean crops in the Corn Belt. The corn crop is almost certain to be substantially lower than in 1973, instead of the large increase anticipated early in the year. The soybean crop will benefit from high prices, but incomes of farmers who lose a major share of their crops will be reduced sharply. Reduced availability of feed grains and forage may cause farmers to liquidate inventories of meat animals, leading to lower meat prices temporarily but followed by higher prices in 1975.