Beige Book Report: Chicago
March 12, 1975
The business downturn continues in the Seventh District. The rate of decline may be slowing, but there are no indications of a near-term improvement in general conditions. The drop in manufacturing employment and output since October has not been matched since 1945-46, and pessimism has not been so deep and widespread since the 1930's. Consumers are buying cautiously, business firms are attempting to cut costs (often reducing staffs), many companies are reducing capital expenditure plans, and lenders are more selective in making new commitments. Reflecting reduced demand, including inventory liquidation, the rate of inflation has slowed substantially and many prices have been reduced.
Regardless of estimates of overall rates of unemployment, it appears that job markets weakened further in February and March. Deterioration has been especially marked in the central cities of Chicago and Milwaukee. (Detroit remains a disaster area, despite recent call-backs of laid-off workers.) Waves of layoffs have continued in a wide variety of durable goods industries, which are predominant in this region. Construction activity is at a very low level, and freight tonnage is down sharply.
Although techniques leave much to be desired, state agencies have been attempting to estimate unemployment in central cities, in addition to metropolitan areas as in the past. For the city of Chicago, unemployment is estimated at 8.5 percent in February, compared with 7.2 percent for the SMSA. For the city of Milwaukee, which had been relatively vigorous, the unemployment rate is estimated at 11 percent for January, compared with 6.5 percent for the SMSA, and 16 percent for a 15 square mile area within the city. The current picture is undoubtedly worse.
In Chicago, a discount department store to be opened in May processed 5,600 applications for 300 prospective jobs. A job conference for prospective college graduates in marketing was able to accept only 800 of 1,400 applicants for interviews, compared with a total of 350 applicants a year ago. The weakness of the job market reflects not only layoffs but hiring freezes and a sharply reduced rate of voluntary separations.
Some unions have moderated demands for upcoming negotiations. Chicago area construction laborers agreed to forego a wage increase for 1975, and electricians will work a four-day week and will accept an unspecified pay cut. Some employers, however, say union militancy is as strong as ever, even when layoffs are large and continuing. Some employers have reduced the wages and benefits of white collar workers and are asking unions to accept similar reductions. However, a survey showed average compensation of executives in the Chicago area to have increased 16 percent from May 1, 1974 to January 1, 1975, compared with a 10 percent rise in the average from 1972 to 1973.
A search for favorable developments yielded scattered and inconclusive reports of increased orders for metal stampings, cardboard cartons, textiles and mobile homes. Some of these reports may indicate the need to correct excessive inventory reductions. Most of the heavy capital goods industries continue to operate at high levels, although with declining backlogs. Auto companies are increasing output schedules through May. Previous drastic cutbacks in output and the sales stimulus of cash rebates resulted in unbalanced inventories. If demand does not pick up a solid basis, these assembly schedules probably will not hold up.
Perhaps no industry was hit so suddenly and so hard by reduced sales and order cancellations as heavy trucks. Plants producing components and finished vehicles that were fighting to reduce heavy backlogs last summer are now operating at about 30 percent of capacity. Experts have been surprised at the rapid turnaround, even those who had forecast a substantial drop-off. A small producer of heavy trucks is in bankruptcy proceedings, Chrysler has pulled out of the market, and marginal plants are being taken out of production "permanently". Highway freight tonnage is down 25 percent from last year. The largest drop in any earlier recession since World War II was 10 percent. Moreover, many trucks had been sold and produced with a view to "beating" the costly air-brake standards that became effective March 1. The current inventory of heavy trucks is equal to about six months' prospective sales. There are signs that demand for heavy construction equipment will soon start down, although probably not so rapidly as in the case of heavy trucks.
Price cuts on manufactured goods have been substantial and widespread, both at the wholesale and retail levels, perhaps to a greater extent than at any time since World War II. Many of these price cuts, e.g., auto rebates and department store markdowns, represent attempts to reduce inventories on hand and will not be permanent. Most costs of production continue to rise, and various manufacturers without inventory problems are raising prices. Prices of some models of autos have been "reduced" by changing the product, e.g., substituting lower grade tires. Prices of services continue to rise rapidly, including apartment rents, hospital care, utility rates, insurance rates, and professional services. Many prices of goods had been at unsustainable levels in view of market forces. Some types of steel are coming down, most nonferrous metals are cheaper, and gasoline stations are in a minor price war. Many price adjustments are indirect—a return to freight absorption, elimination of extras and surcharges, and restoration of quantity and cash discounts. Individual negotiations between buyers and sellers are more likely to result in lower prices. Overall, price reductions on goods probably are not fully reflected in official indexes.