July 9, 1975
A widespread consensus in the Seventh District accepts the view that the bottom of the general recession has been passed but that full recovery will not be achieved for a long time—perhaps not until 1977. Business conditions in the District appear less favorable than in the nation. Some capital goods producers are beginning only now to reduce output, and no near-term revival is in sight. Demand for consumer durables and building materials remains depressed, although there are scattered signs of improvement. Inventory reductions are still under way in most manufacturing firms. Virtually all materials and parts are readily available. Many producers of equipment for consumers and business, nevertheless, will attempt to raise prices substantially as soon as market conditions and public policies permit. Job markets remain very weak. Construction activity, in total, is unlikely to strengthen this year. Crop prospects are excellent, with a record corn harvest and, at least, a near record soybean crop expected.
Demand for such items as draglines, huge electric mining shovels, overhead cranes, steel mill equipment, chemical processing equipment, and pollution control facilities remains excellent. Some producers of this equipment are pushing their own expansion programs, with one maker of heavy mining equipment planning to double capacity in the next three years. However, most other capital goods producers, who account for a much larger volume of activity, are cutting output. Demand for heavy trucks is almost nonexistent, despite rebates and attractive new features. Sales of most types of equipment for agriculture, construction, metalworking, and materials handling are down very sharply.
A revival in most types of capital spending is expected to lag the general economy by two, three, four, or more quarters. Many users of equipment had been buying in excess of current needs during the boom, and the recession resulted in rapid melting of backlogs and heavy inventories of finished goods at the factory, distributor, and user levels. In addition, the rapid change in psychology from excessive exuberance to pessimism will have lingering effects. Finally, there is concern that rising interest rates will deter some sales. Equipment producers have reduced hours, pushed early vacations, shifted workers among divisions, and have allowed attrition to reduce payrolls. Substantial layoffs may prove necessary, however.
Inventories of most consumer goods, both hard and soft, are said to be moderate at the retail level, while manufacturers' inventories of materials and components to produce consumer goods are described as "low." A significant rise in consumer purchases, therefore, would require restocking. Producer equipment manufacturers, however, are still liquidating inventories of purchased supplies and materials, and they would like to reduce finished goods on hand. Virtually all items are available on very short notice, often with price concessions. Because of reduced profits caused by lower volume and rising costs, overall, many manufacturers are waiting for an opportune time to raise prices of finished goods substantially.
Steel demand is equal to about two-thirds of capacity. There has been some pickup in orders for lighter steel products used in consumer goods, but demand for plates and other heavier products is down sharply. Steel mills are proceeding with deferred maintenance at a leisurely pace, in contrast to the rush atmosphere of some recent years. A District steel producer, with a strong market position, has embarked on a $1 billion program to boost capacity 25 percent. Work has been started on a huge new blast furnace approved last fall. Completion is scheduled for the fall of 1978.
Retail sales in June apparently did not continue the improvement noted in May. Sales of autos, recreational equipment, appliances, and televisions remain slow, more so in the District than in the nation. Increases in output in some of these lines reflect mainly the need to balance inventories. Also, start-up production of new model cars, television sets, and other items in the summer will require worker recalls.
Auto companies plan a $6 billion, five-year program to manufacture a "new generation" of smaller, lighter cars. Some tooling design work has been ordered. Orders for dies, molds, fixtures, machine tools, and welding and assembly machines will come later.
Residential construction activity in the District remains at a very low level, with apartments especially weak. Mortgage money is available, usually at 9 percent with 30 percent down, but many buyers are repelled by high prices and rising costs of home ownership. Lenders are worried about increased difficulties in foreclosure proceedings. Some builders in the Chicago area are eliminating extra baths, dining rooms, and other "frills," and are making garages and air conditioning optional to keep prices in the $30,000 to $35,000 range. Skeptics refer to these units as "1945," or, even as, "junk houses." Developers complain that financing is hard to get, even at 10 percent. Many builders want heavy subsidies to help sales. Despite these problems, residential building is expected to show slow improvement, but prospects for new office buildings and shopping centers are dim.