Beige Book Report: Chicago
January 14, 1976
Although great caution prevails among business executives and lenders in the Seventh District, there is general acceptance of the view that activity will be substantially higher in 1976 than in 1975. The big news of the past several weeks has been the strength of retail buying in the Christmas period and also in the post- Christmas period. Layoffs of workers are at a much reduced rate in virtually all centers, but new hiring is still at a slow pace. Sales of autos and some other hard goods have been better than expected. Steel shipments are expected to improve significantly this quarter. Capital expenditures are likely to remain slow, overall, in the first half. Real estate transactions, mainly on residential properties, have increased substantially in recent months.
Despite widespread uneasiness, virtually all observers appear to accept the view that the general economy will improve throughout 1976, with real gross national product (GNP) up about 6 percent. Various surveys indicate that the expansion is expected to continue at a disappointingly slow pace in the first half with a significant acceleration in the second half. Among the specific recent projections by District business leaders for 1976 are: airline passenger traffic up 6.5 percent, steel shipments up 22 percent, color TV up 20 percent, major appliances up 15 to 20 percent, autos up 10 percent, trucks up 20 percent, and housing starts up 25 percent, all in physical terms. A big boost is expected for recreational vehicles and mobile homes. None of these projections suggest that new record highs will be achieved. Producers of most capital goods are very reluctant to offer specific forecasts.
Gains in Christmas sales over year-ago levels were large and exceeded the expectations of most retailers. In fact, a number of reports suggested that sales would have been even stronger if retailers had not "run out of goods". The post-Christmas period has not witnessed the heavy markdowns noted last year. Nevertheless, dollar volume apparently has continued at a relatively high level.
New layoffs have been at much lower levels in recent weeks than last year. However, a larger number of plants than usual were shut down for two weeks or so of "vacation" over the holidays to help bring inventories into line. Most employers are very cautious on new hiring. One exception is a major airline, which is actively recruiting new cabin attendants for the first time in three years.
Sales of new autos were larger than expected in December, but there was great variation by model. Some models are virtually out of stock. The 2.1 million car production schedule for the first quarter is said to be "very tentative", with a close rein on shipments from suppliers of components. Motor vehicle employment may rise somewhat further, but unemployment in the manufacturing centers is almost certain to remain very large.
Demand for major appliances and TV sets was below expectations in November and December, but some improvement was reported in recent weeks. Producers are fairly confident of substantial gains in sales in 1976. Inventories are low, especially if sales pick up.
Recreational vehicle (RV) producers enjoyed a surge in orders late in 1975, as dealers decided to start rebuilding depleted inventories. Some of the RV producers who survived the severe "shake-out" of the past two years are now operating at full capacity.
Steel shipments were low in the fourth quarter, partly because of the October 1 price boost and partly because of a reluctance to build inventories before the turn of the year. Orders booked for the first quarter indicate that shipments will rise substantially, especially for lighter steel products.
Capital goods producers report some improvement in orders recently, especially for products that were very depressed last year, such as light construction equipment and materials handling equipment. No general turnaround in capital goods is expected until after midyear. Many firms are reevaluating capital expenditure programs with an eye to cancellations or delays. Unprofitable operations often have been sold or are slated for sale liquidation. Retail chains have stepped up closing of marginal stores, especially smaller stores in older sections. Auto producers will be ordering a large amount of equipment to make smaller cars in 1976 and in the next several years, but this equipment will be installed, almost entirely, in existing plants.
Real estate circles are encouraged by the continued strong inflow of savings to the savings and loan associations. Loans are more available, and prices of existing residential properties have remained firm. A large title company reports that its title volume (in dollars) returned to the May 1973 level late last year. Business is weakest in the Southeast and strongest on the West Coast.