August 13, 1975
Although signs of economic revival are much less clear in the Seventh District than in the nation as a whole, an improvement is expected in many sectors in the next few months. Demand for workers remains very weak. Order backlogs of capital goods producers, very important here, continue to erode. Most companies are still cutting inventories. Consumers remain cautious, especially for purchases requiring extensions of credit. Construction of single-family homes has revived somewhat, but prospects for apartments and commercial projects are poor. Crop projections are very good in District states east of the Mississippi, but parts of Iowa have been hurt by drought. District experts believe that the Department of Agriculture has underestimated foreign demand for United States grain, mainly because foreign production is being curtailed by adverse weather.
Purchasing managers' reports for Chicago and Milwaukee show further declines in output and new orders for June and July, in contrast to the improvement noted in the national reports. Nevertheless, there is greater confidence of a general pickup as the second half proceeds. Inventory liquidation continues in full swing. Employment at reporting firms continued to decline in July but at a slower pace.
The generally less vigorous tone in this District, compared with the nation, reflects the relatively greater emphasis on producer goods and consumer durables. Order backlogs of most producers of equipment for agriculture, construction, transportation, and industry have declined sharply since the turn of the year. Because no near-term improvement in demand for their products is expected, many equipment producers have been cutting inventories, reducing employment, and stretching out expansion and modernization programs.
Sales of autos and light trucks have increased somewhat, but there are large differences among makes and models. With strenuous efforts to reduce stocks of 1975 in process, evaluation of the basic strength of the car market probably will not be possible until late October or November. Sales of recreational vehicles have improved slightly, but sales of mobile homes remain very poor, partly because of reduced availability of credit. Inventories of furniture and appliances are now in line because of reductions in output rather than increased sales.
Major retail chains report that their sales in the Midwest are weaker than elsewhere in the nation. These companies complain of lack of customer response to sales promotions. Various sources indicate substantial strength in demand for auto and truck parts for replacement purposes, as owners delay purchases of new vehicles.
There are no procurement problems for standard material and components. Delivery times are very short for most items, and price competition is widespread, at least compared with a year ago. Prices on some types of steel products, e.g., rebars and cold finished bars, have been reduced. Price competition in metal fasteners is said to be "fierce", although demand has picked up modestly in the past two months after a sharp decline that lasted six to eight months. In most sectors, however, price concessions have been much less than might have been expected in view of the extent of the recession. Plants have been closed, permanently in some cases. Prices of residential building materials have remained at high levels or have increased further in the face of much lower demand.
Construction of single-family homes has increased somewhat in the Chicago area, but merchant builders are proceeding cautiously with a few homes at a time. Development of new subdivisions has not revived. Apartment construction remains very depressed, as financing for new projects has been closely restricted and a large inventory of unsold or unrented units is still on hand. Announcements of new office buildings and shopping centers are rare, and work on projects under construction has been slowed or stopped in some cases. A recent survey finds that several major buildings scheduled for the downtown areas of Milwaukee have been postponed or canceled because of lack of financing or because of reduced estimates of demand.
Crop prospects in most of the District remain very good, although estimates for Iowa have been reduced because of drought. District analysts believe that crops in Europe and other areas will fall far short of earlier estimates. Foreign demand for United States grain is now expected to approximate 1972 levels, with resulting upward pressure on prices. Our survey of farmland values showed a surprising 4 percent rise in the second quarter, following more moderate increases in the previous six months. Values at midyear were up 15 percent from a year earlier. Farm credit conditions have eased, as rural banks have become more liquid and Federal funds transactions have been less profitable.