Beige Book Report: Chicago
August 11, 1976
Shortages and stringencies have not yet emerged except for items in especially strong demand as "vans" and certain other vehicles. In fact, demands for chemicals, paperboard, apparel, and appliances have fallen short of expectations, and some prices are soft. Steel lead times have shortened since the spring. The coal strikes could cut steel output, if not settled soon, because coke is already in short supply. Natural gas will be a serious problem if the winter is cold.
Inventory building continues on a cautious basis. Field inventories of some capital goods components and some finished goods are described as "skinny" or "lean". Some producers have attempted to get distributors to stock up through liberal credit terms.
The July survey of the Milwaukee Purchasing Managers shows over 70 percent reporting paying higher prices for the third straight month, compared with only 1 or 2 percent reporting lower prices. In July 1975, 20 percent reported higher prices and 6 percent reported lower prices. Many manufacturers will raise prices in the near future to offset higher costs of labor, supplies, or services. For example, diesel engine prices are expected to rise 6 to 10 percent. Insurance premiums will be boosted 10 to 20 percent. Most utilities have applied for substantial rate increases.
Negotiations of the United Auto Workers with the motor vehicle and farm equipment producers are expected to be resolved without a strike. (A long rubber strike was expected.) The auto workers have a rather favorable position relative to most other factory workers. The union is said to be pushing "job security" measures, including restrictions on subcontracting and imports of major components. The companies want a ceiling on health care payments and effective penalties on absenteeism. The settlement probably will be in the area of 10 percent for the first year.
In the white-collar field, Chicago consulting firms expect increases in compensation of 7 to 8 percent this year and next, slightly less than last year. The number of executive hirings is about 30 percent higher this year, and salaries are up 8 percent or more.
Large general merchandise chains continue to report sales below budgeted levels. Apparel and fashion goods are the weakest items. Among the stronger items are microwave ovens and home-improvement supplies. Credit sales account for a larger share of total sales, and experience is more favorable. Some types of motor vehicles are in short supply. Van sales, often at the full sticker price, are expected to exceed 500,000 this year and to rise by the amount permitted by manufacturing capacity in 1977.
A steel company is not disturbed by reports of slow demand this summer. This firm's orders for October delivery are much stronger now than they were at the same point in 1972, prior to the big upswing. Auto companies' orders for steel are in line with optimistic sales projections. A slight improvement is noted in orders from equipment producers. Delivered prices of imported steel have increased and are now equal to domestic prices.
Sales of some important chemicals declined in June and July and were well below budgeted levels, although still above a year ago. There are even indications of a shift from inventory accumulation to liquidation.
Oil supplies are adequate, currently, and prices are stable, but there is concern that new price and pollution regulations will cause problems. If the announced rise in prices of interstate natural gas shipments becomes effective, a pickup in drilling of new gas wells is expected. Oil-well drilling volume increased earlier this year but mainly in proven fields at shallower depths.
Capital spending programs shelved by auto and steel companies in 1974 are being revived. Auto companies are spending for new products, not expansion. Steel company projects are for replacement of obsolete facilities (including pollution control) and to increase capacity of blast furnaces, coke ovens, and rolling mills. Orders for locomotives and freight cars have increased from very low levels. Various airlines are ordering new aircraft. Higher fuel costs alone make it desirable to replace fifteen-year-old jets with more efficient models. Sales of trucks, trailers, farm equipment, and lift trucks are at good levels. Construction and mining equipment orders remain slow. Various companies report that export demand for capital equipment is stronger than domestic demand. Orders from OPEC nations (Organization of Petroleum Exporting Countries) and the USSR for equipment for construction, mining, and oil production are especially significant.
Rural bankers report District farmland prices at midyear to average 30 percent above a year ago—as much as 40 percent in some areas of Illinois and Iowa. Strong demand for farm production loans and equipment loans is being accommodated by rural banks with ample funds.