Beige Book Report: Chicago
May 12, 1976
Business expectations continue to improve in the Seventh District.
The greatest immediate concern is the unresolved rubber strike,
which could drastically curtail motor vehicle output if it continues
through the current month. Looking ahead, business and financial
executives anticipate the reappearance of shortages on a widening
scale as the upswing continues, and an acceleration of price
inflation.
The capital goods picture is somewhat brighter. Retail
sales are excellent on a broad front. Single-family home
construction activity has increased sharply, but other construction
lags. Some S&Ls are attempting to dampen the rapid inflow of
deposits. Demand for business loans at banks remains soft. Farmland
prices have increased very rapidly. Crop plantings are on schedule,
or ahead.
The rubber strike that started April 21 was expected to cause serious trouble after about 30 days. Some cars and trucks already are being shipped without spare tires to extend supplies. The tire supply situation varies by model and is much worse for trucks than for autos, but all vehicle producers would be affected if the strike continues into June.
New orders have improved in most manufacturing industries. Order backlogs either are rising or are declining less rapidly. More firms are planning to strengthen inventory positions and various capital expenditure programs are being reevaluated in the light of the more favorable outlook. The fact that many executives remained skeptical of the durability of the upturn until fairly recently means that decisions are only now being taken that will promote further expansion. Partly for this reason, fears are growing that margins of unused capacity have been overestimated, as in 1972.
Order lead times are lengthening gradually, and more companies complain about a deterioration in "dependability." Supplies of some items are already inadequate, including various models of appliances, cars, trucks, and motor homes. In the latter case, output is limited by availability of components with no improvement likely. Steel is expected to be in short supply in the fourth quarter.
Labor costs in many industries will rise 8 to 10 percent this year and there are doubts that the improvement in worker productivity will be sustained. Costs of materials, including steel and major nonferrous metals have increased recently, and are expected to rise further. Costs of insurance are soaring-auto, homeowner, and medical policies by 20 percent or more this year. An oil executive says refinery construction costs have doubled in the past three years, and may double again in another five years. The rise in housing construction costs has been cut in half, to about 5 percent, but may accelerate again.
Output of heavy trucks, highway trailers, and related components has increased rapidly in the past two months. This uptrend is based not on actual sales, which remain very slow, but on expectations of increased sales, which one expert believes are about to "explode" as highway truck tonnage approaches capacity. This observer projects heavy truck sales at a new high for 1977.
Sales of light construction equipment associated with home building have increased, but demand for heavy construction and earth-moving equipment has remained at a low level all year. One very large company is using this opportunity to build finished goods inventories in anticipation of an eventual uptrend in sales.
Orders for machine tools and sales of used machine tools have increased significantly, but order backlogs continue to decline, although at a slower pace. Sales of lift trucks and office furniture have improved. Demand for farm equipment is excellent. Oil exploration activity is slipping somewhat. Electric utilities are moving ahead more vigorously on new generating facilities as demand increases at a more normal pace.
A major Chicago-area steel company with a strong market position says its new orders have exceeded capacity since January 1 and that output has been at capacity since early February. Promised delivery times have doubled since year-end. Many users apparently are building steel inventories again. A pickup in demand from the producer goods industries could mean general shortages of steel late this year. Foreign producers are not pushing sales here as much as in the past.
Retail sales for March and April probably should be considered together because of seasonal adjustment problems. Merchants are generally very pleased. Credit sales have increased relatively and collections are favorable. Except for subcompacts, car sales have been very strong. Motor homes and other "RVs" are booming again and some observers expect a new high for 1976. RV sales currently are limited by supplies. Except for freezers, all major appliances are showing large gains from last year. Sales of TV sets remain slow but an uptrend is expected in the fall. Japanese interests have acquired another U.S. TV producer, and the market is very competitive.
Permits for single-family homes were double last year's level in March in major centers, and this uptrend apparently has continued. Apartment permits are up somewhat, but remain far below earlier years. Some S&Ls are limiting the extremely rapid inflows of deposits by restricting the size of passbook accounts and CDs. Typical home loan rates have moved down to the 8.5 to 8.75 percent range, and further easing of credit is expected to be reflected in reduced down payments. The Illinois usury rate will revert to 8 percent at year end. This could cause problems if an extension is not voted several months before the deadline.
Reports of 7th District bankers in our most recent land value survey indicate that prices of good farmland rose about 7 percent on average in the first quarter, to a level 27 percent above year-ago. Reports were strongest from Illinois, but all sections of the District showed gains.
Crop plantings are well along in the cornbelt. The picture in Iowa is about normal, while plantings in Illinois and Indiana range from normal to ahead of normal.