Beige Book Report: Chicago
June 16, 1976
Tire inventories at all levels proved to be much larger than almost anyone had estimated. Shipping vehicles without spares has conserved supplies. Also, the industry has been operating at a higher rate during the strike than had been thought possible. Supervisors and the clerical staff are operating most of the tire plants that are on strike—in one case at 35 percent of capacity.
Some of the slowing in sales of general merchandise in May is attributed to cool weather. Consumer attitudes are improved. They are using credit freely and are paying bills more promptly. Demand for appliances is not as strong as had been expected. One observer now expects sales of appliances to be up 10 to 12 percent this year, rather than the 15- to 20-percent gain expected earlier. Strength in auto sales may be adversely affecting appliances. Orders for furniture are sharply above last year, and factory backlogs are up about 40 percent. The boom in sales of RV's continues, and boating equipment also is very strong. Airlines traffic is up 13 percent from last year's depressed period, and a gain of 10.5 percent is now expected for the year—up from 8 percent forecasted earlier.
Inquiries concerning shortages and bottlenecks revealed few immediate problems. Much depends on how rapidly inventories are increased which could cause lead times to lengthen markedly and possibly bring back double ordering. Most producers of capital goods and components have increased capacity significantly since 1973. Castings and forgings may become short again but only if capital spending accelerates.
Restrictions imposed by regulations of EPA, state and local bodies, and private legal actions have hampered expansion of capacity. A large share of capital spending is channeled into environmental and safety facilities. Many foundries, forging operations, and coke ovens have been closed down and others will be. Restrictions have been placed on start-ups of oil refineries which take three to four years from go-ahead to completion and electric utility plants which have even longer lead times. Some new coke ovens, which meet operating rules, are not producing efficiently. Restrictions on operating rates hold down output at nuclear power plants—usually the lowest cost units.
Steel may prove to be the major limiting factor on industrial production again. Steel is expected to be in tight supply in the fourth quarter and in 1977. Shipments from U. S. mills probably are limited to 100 million tons this year and 105 to 108 million next year. At present, foreign suppliers can be counted upon to supplement supplies. The potential bottlenecks in steel production are availability of coke and high-grade ore pellets. Various steel companies slowed expansion programs during the recession.
Oil would soon be a serious problem in case of any interruption of supplies from abroad, which now account for over 40 percent of domestic supplies. A 5-percent increase in OPEC prices is expected by year-end. Spot shortages of gasoline are expected this summer, particularly of lead-free gasoline which is highly susceptible to contamination and must be produced and distributed with great care. Oil refineries are operating at 89 percent of capacity, currently, and 92 percent (by this measure) is considered to be the practical maximum.
Most industries interviewed thought that capacity is adequate except for special developments such as long strikes. Nevertheless, purchasing managers are continually checking primary and secondary sources as to future availability. Most observers believe that price/wage controls were a major factor causing the shortage in 1973-1974 and would be again if reinstated.
Tightness in supplies develop from time to time in such industries as paper and wood products when Canadian supplies are interrupted by strikes. Lumber prices, for example, spurted recently. Other problems develop when older, higher-cost facilities are reactivated.
The trucking industry is estimated to be operating at 91 percent of capacity and is expected to be at 95 percent by year-end. Retail sales of heavy trucks improved recently and are expected to go much higher. Orders for major truck components are up sharply, and a producer of diesel engines is operating at virtual capacity.
Orders for bearings, controls, electric motors, and other components have increased significantly, partly to restock dealers. Demand for replacement is also higher. None of these industries have immediate capacity problems and do not expect any for this year. Sales of farm equipment are excellent But not so ebullient as two or three years ago. Small construction equipment sales are up, but large earthmoving equipment remains depressed. Operating rates of most machine-tool producers are well below capacity.