Beige Book Report: Chicago
December 10, 1975
Economic activity appears to be improving very gradually despite many uncertainties. Layoffs are less frequent, but few employers are hiring actively. Retail sales were held down in November by unseasonably mild weather, but most merchants contend that Christmas volume will be good, at least compared with last year's depressed level. Many manufacturing companies are continuing to reduce inventories, but others have completed adjustments, and retailers' stocks generally are on the low side. All goods and services are in amp1e supply and most markets are competitive, but prices of manufactured goods continue to rise. Various companies are reevaluating capital spending plans because of ample capacity and high costs of equipment and new construction. Developers of new residential subdivisions are active again after a long period of hibernation.
Retailers complained that warm weather during most of November held down sales of seasonal merchandise. Sales of nonseasonal items were also hurt because of the adverse effect of weather on customer "traffic." Colder weather and snow in recent weeks has had a salutary effect. A revival in sales in December could easily offset the November performance as it has so often in the past. Producers of appliances and television sets have been disappointed by the level of demand for their products. Retail inventories are generally low and could limit total Christmas volume because most buying commitments were made in October.
Sales of autos and small trucks are much improved from last year's depressed level but remain well below the rates of two or three years ago. Most auto industry analysts do not expect that new peaks in sales will be achieved until 1980 or later. Some analysts of markets for appliances and televisions hold similar views.
Sales of heavy trucks remain depressed despite a pronounced pickup in freight movements since last spring. The new brake systems required since March 1 are said to be holding down sales because of fears of malfunctions and resulting heavy damage suits.
Virtually all goods and services are readily available from suppliers. One exception is quality shoes and boots. No significant supply problems are anticipated for petroleum products. Gasoline prices weakened in early November, but part of the decline has since been restored. While markets for most goods are competitive compared with the period prior to the fall of 1974, most prices are holding up or rising further because of cost pressures resulting from boosts in wages and benefits, and rising costs for utilities, insurance, and other needs.
Fourth-quarter steel shipments will be the lowest for the year and somewhat below earlier expectations. Heavier steels for equipment have weakened further while demand for steel for consumer products has picked up. Some major projects to expand steel capacity have been halted or are being reevaluated. One steel company says its expansion program is going ahead full steam, but this statement appears to apply to projects already started.
Some diversified capital goods producers who had been cutting output say that the decline has about ended and that recalls of workers are probable after the turn of the year. New orders for railroad equipment are at very low levels, but shipments have declined only moderately as substantial order backlogs are worked off. Demand for small construction equipment will revive if the expected improvement in home building materializes. Farm equipment sales are expected to rise next year because of higher than expected cash receipts and anticipated heavy plantings of crops.
The dollar volume of transfers of existing homes and apartments has been very high in recent months while prices have been maintained or have increased further. Residential developers are "starting the process" once again after about 18 months of inactivity but mainly for single-family home projects. Construction loans are available at about 10 percent, compared to 14 percent or more during the crunch, but lenders are very careful in evaluating new risks. Inventories of unsold apartments have been reduced substantially, but it is unlikely that new apartment building will rebound vigorously. A large new hotel was started recently in downtown Chicago, and some shopping centers are still being completed. But commercial building prospects remain poor. Office vacancy rates are about 14 percent downtown both in Milwaukee and in Chicago and are even higher in outlying areas. This compared with an "acceptable" rate of 5 to 7 percent.
Auto insurance companies are pushing for large rate increases, 12 to 20 percent, to eliminate underwriting deficits, although increases of similar magnitude had already been posted this year. Soaring claims for property damage and personal liability are responsible. Increases in rates on homeowners' policies also have been very large. Costs of malpractice insurance for doctors, hospitals, and other professionals and for manufacturers' product liability have multiplied in recent years and are still rising rapidly. There is also a push for shorter-term insurance policies, perhaps to a half-year for auto insurance.