Beige Book Report: Chicago
January 15, 1975
The economic situation in the Seventh District has continued to worsen rapidly. Most companies and governmental units are laying off workers or are pursuing a very tight policy on new hirings. With heavy capital goods still an exception, output is declining in most manufacturing sectors. Inventory-reduction programs are now widespread, as shortages of many materials and components have turned into surpluses. Many consumers have cut spending of big-ticket items and are using credit less extensively. Firms selling in Canada report that demand continues to be relatively strong there, both for consumer and capital goods. There are no early prospects for a revival in construction, either residential or nonresidential. Farmers intend to plant very large acreages this year. Hog and poultry production is being reduced very substantially. Most analysts expect real gross national product (GNP) to decline further in the first and second quarters, perhaps with industrial production bottoming-out in the third quarter.
The rapid rise in unemployment compensation claims to record levels has swamped official agencies, especially in the Detroit and Chicago areas but also in many smaller centers. The extent of the unemployment problem in both the Chicago and the Detroit areas is probably unprecedented since World War II, with no early turnaround in sight.
In recent days, thousands of people have jammed Chicago's City Hall to apply for 977 "public service jobs" allotted under the Federal program. Most consumer goods producers and some capital goods producers have laid off workers. Some have substantially extended normal Christmas or January "vacations", with salaried workers often included. Various state and local governments have either reduced staff or have frozen hirings, pleading budget restraints. No important employers appear to be hiring actively.
A substantial majority of firms are cutting inventories, often hoping to cut their total by 20 percent or more in two or three months. Inventory reductions are dictated, in part, by financial stringencies, but more commonly by the return to a "full-fledged buyers' market". Lead times have been reduced very rapidly, and vendor dependability has improved. Prices are "being negotiated again", and prices of many materials and components have softened.
Virtually all types of steel are now available, despite production problems associated with shortages of coal and other materials. Plates and structurals for capital goods, however, are still on allocation. Fabricators of steel for industrial structures are still operating all out, but little new business is being booked. A producer of farm equipment says it may have to lay off workers because it has depended on steel from the Gary open hearth furnaces, shut down on January 1 by EPA order. One steel company expects total mill shipments to be off 10 percent in 1975 from last year. The first quarter may be off 17 percent, partly because of unexpectedly large imports of high-priced foreign steel in recent months. Raw steel output will be fairly well maintained as mills rebuild depleted inventories.
Inventories of all major petroleum products are "very comfortable". Most companies are pushing exploration at full speed, but no new refineries are planned and some projects have been stopped in midstream. The problem is availability of crude. Refineries are operating at 85 percent of capacity, including imports of natural gas liquids, compared with virtually 100 percent prior to the oil embargo. The President's desire to cut oil imports by 1 million barrels a day is regarded as unrealistic, because domestic crude output is still declining.
Producers of heavy capital equipment for basic industries continue to operate at capacity, but backlogs are declining. A very large producer of earth-moving equipment says lighter equipment is now off allocation, and all but the very heaviest machines will be off allocation by midyear. Reported declines in net new orders for some capital goods are exaggerated because firms have deliberately "purged" or "dried out" these backlogs.
Order backlogs for heavy trucks "dissolved" in the fourth quarter. One expert believes sales of heavy trucks will be off by one third in 1975. Inventories in the field turned out to be much larger than had been thought, and some fleet owners purchased many trucks that have not been operated. Some orders had been duplicated, and substantial advance buying had occurred to beat the brake standards set for March 1. Postponing these standards again could hurt sales, because truck producers have been stocking the necessary components.
Retail sales of general merchandise are reported to have improved just prior to Christmas. Most consumers are buying cautiously, but sales of high-priced items, e.g., autos, furniture, and houses, have been relatively well maintained. Widespread price cutting by retailers, starting in November, may not be adequately reflected in the consumer price index. Real volume has been higher for some major chains. Retailers are trying to cut inventories as much as possible by January 31, the end of their fiscal year. Some banks and retailers report a rise in consumer delinquencies, but not of alarming proportions.
Inventories of new autos are very heavy relative to sales, especially for subcompacts and imports. Nevertheless, reduced first-quarter output schedules are probably firm for all but one producer "who has no schedule". The atmosphere in Detroit is almost desperate. Sales of used cars have been very good, prices have been strong, and "independent" dealers have been prosperous.
Sales of houses and apartments have remained very slow. Inflows to savings and loan associations have improved, but most of them wish to pay off high-cost debt. Illinois savings and loan associations are not making commitments past June 30, when the treasury rate reverts from 9.5 percent to 8 percent. Land development of all types "collapsed" in the fourth quarter.