Beige Book Report: Chicago
October 13, 1976
The past month has produced no solid evidence from Seventh District sources that the tone of less vigorous growth and general caution reported in previous months will soon change, either for better or worse. There are no problems with shortages either currently or anticipated in the near future. Expectations of a near-term acceleration in price inflation for manufactured goods have moderated. Large retailers report good levels of sales, but somewhat less than had been anticipated. Demand for capital goods, overall, has not improved significantly with increases in some lines about balancing declines in others. The single-family housing boom continues, but prospective increases in other types of construction are relatively moderate. The supply of loanable funds remains ample in all sectors. Although it is commonly asserted that the November elections "will not change anything," many observers believe that uncertainties related to a possible change in the political environment are partly responsible for caution in executive decision making.
Chicago area purchasing managers report for September shows somewhat higher rates of increase for new orders, output, and backlogs. Slightly over half of the group expects better business activity in the fourth quarter, compared to the third quarter, against only 9 percent who see a decline. For the first quarter of 1977, 70 percent expect an improvement, while 10 percent see a decline. The proportion reporting higher prices paid dropped to 53 percent in September, about the same as a year ago, but down from 75 percent in both July and August. However, the proportion reporting lower prices paid has been virtually zero for the past twelve months.
Although price increases continue, most boosts are smaller than expected and others are being delayed awaiting stronger markets. Steel producers, having canceled the boost for sheet scheduled for October 1, are anxious to please customers with promises of quick delivery and improved quality and service. Paper companies report similar conditions. The main products for which lead times have lengthened significantly recently are various electrical components, but no one speaks of shortages. Some concern had existed several months ago as to the availability of ferrous and nonferrous castings, but a diversified independent foundry says "when do you want it?" A very large general merchandiser expects prices paid and received for consumer goods to average 4 percent higher in 1976 and sees a 4.2 percent average rise for 1977.
The increase in retail sales from year-ago in most Seventh District areas seems to be about in line with the rise in disposable income. Purchases of motor vehicles continue strong with only a minor loss thus far because of the Ford strike. One Chicago area lender has begun to advertise 48-month car loans, but most banks have held to 36 months, except for very good risks. Consumer credit experience has been favorable. Television sales are up significantly this year, but not as much as expected, and Japanese imports are taking a larger share of the market. Another Seventh District TV producer recently was acquired by Japanese interests.
Consumers continue to spend freely for travel and entertainment. A major airline reports the increase in air travel to be above expectations, with trips to Hawaii near capacity. A large amusement park, which opened north of Chicago in late spring, started slow, but now expects two million guests this year. Outlays per family average at least $50, with many waiting out long lines.
Exhibitors of the international machine tool show held in Chicago in mid-September gave mixed reports on business generated. There was great interest in new labor-saving machines. For example, some machine tools now can operate for two days unattended. Wisconsin producers of large machine tools say that orders for big units are "beginning to move." Several companies see a gain of about 20 percent in orders for 1977 with a marked improvement already underway.
Demand for large earth-moving equipment continues to lag badly, and one producer has just reported a layoff. However, this company is stepping up production of front end loaders, mainly smaller units, which had been cut back.
Slow demand for producer equipment in general is the main factor causing steel producers to reduce forecasts of consumption. Various reports from architects, engineering firms, contractors, and zoning authorities indicate some revival in nonresidential construction activity, but mainly for smaller projects.
Apartment building permits granted in the Chicago area are running far above last year, but are only a fraction of the level of the early 1970's. Lenders are much more cautious than a few years ago and some overhang of vacant units remains, but, most important, current rentals do not justify most plans offered by promoters.
A major airline has placed a substantial order for new
B727-200's to
replace older DC 8's. This order was not expected to be placed so
soon.
Traffic has improved, but the major factor is lower fuel consumption by the new aircraft. One railroad has placed a substantial order for locomotives and freight cars with District producers, but railroad capital spending, overall, is still far below the levels required to maintain the systems properly.