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Chicago: December 1976

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Beige Book Report: Chicago

December 15, 1976

Confidence that the expansion will continue appears to have strengthened in the Seventh District in the past month. Most observers believe that the recent slowdown is about to give way to renewed growth. Fears of price and wage controls are causing some companies to post price increases earlier than had been anticipated. Large retailers are very pleased with recent levels of sales. Output is expected to be significantly higher in virtually all industries in 1977. Abnormally cold weather has sharply boosted sales of natural gas. The outlook for capital goods is somewhat brighter. Apartment construction is expected to rise substantially next year. The financial picture in the district is generally excellent, but farm credit conditions have deteriorated in some areas.

Most business and financial executives and analysts accept the standard forecast that both real GNP and the price level will average about 5 percent higher in 1977. Most expect some acceleration as the year proceeds. Moreover, most believe that their own businesses will show gains approximating those foreseen for the general economy. There is a sharp divergence of opinion on the need for tax reduction. All agree that a tax cut would be stimulatory, but many believe that activity will improve without such stimulus. Confidence is judged to be of crucial importance, particularly for capital spending. Most business executives do not believe that an increase in the investment tax credit from 10 to 15 percent would have a significant impact on demand for capital goods.

Supplies of all goods and services appear ample at the present time. However, gypsum board and lumber will be in tight supply if housing starts reached the 1.8 million level, which is commonly accepted as a reasonable guess for 1977. Late in 1977, shortages of gray iron castings, forgings, raw steel, and certain chemicals are possible and even predicted by some analysts.

Although prices of various materials—e.g., nonferrous metals and paper-board—are soft currently, many producers of components and finished goods are posting increases in prices to "catch up" with rising costs. Partly, this reflects fears of new price controls, despite assurances to the contrary. Some increases in list prices may not hold up in the marketplace.

Despite talk of "inventory congestion," we are unable to find significant examples of excessive inventories. Small cars are a notable exception. Production was adjusted rapidly by steel, appliance, chemical, and paperboard companies when demand lagged expectations.

Major retailers report that their total sales showed excellent increases in November and early December. Credit sales have increased relative to the total and collection experience has been good. Consumers are said to be "loosening up." In contrast to experience of the largest merchandisers, some smaller companies report little or no increase in sales from a year ago.

A major airline reports that passenger travel, measured in seat miles, rose significantly in November, seasonally adjusted, following a flat trend from the spring through October. For 1976 as a whole, traffic is expected to be up 10 percent and a 6 percent rise is projected for 1977.

Forecasts of auto sales have been reduced for both 1976 and 1977 by most analysts, but a rise of about 5 percent still is expected for next year. Sales of compacts and subcompacts have been even poorer than expected, while most intermediates have done very well. Saturday and even Sunday overtime is scheduled for components of the most popular models. Sales of RVs have been excellent. Sales of heavy and medium trucks are expected to rise about 25 percent next year, but sales of light trucks may decline.

Demand for capital equipment continues slow, but some improvement is discernible overall. Sales of most types of heavy construction equipment remain very poor with no signs of a revival. Farm equipment sales are expected to be down 5 to 10 percent next year. On the upside, orders for electric motors, controls, materials handling equipment, overhead cranes, hoists, and some types of mining and construction equipment have strengthened recently. Overall, demand for capital equipment is expected to be significantly higher in 1977.

Output of industrial chemicals has been about flat since last spring following a strong upsurge early in the year. For 1976 as a whole, unit output of various major groups of chemicals is expected to be up 10 to 20 percent, and increases of 3 to 10 percent—at least 5 percent overall—are forecast for 1977. Although capital expenditure programs of chemical companies have been scaled down, further gains are predicted for 1977. The chemical industry is operating at about 80 percent of "capacity." At the time of the worst shortages in 1973-74 operations were at 87 percent of capacity. Partly because of the reduction in capital spending plans, some analysts predict a return of important shortages in late 1977 or in 1978.

Thus far, the winter has been the coldest in 80 years or more in most areas of the district. Sales of gas by one utility are up 20 percent from last year, but supplies appear to be adequate. Electricity sales are also up with December recording the peak load this year, above the usual summer peak. Gas bills for home heating are expected to be 35 to 40 percent higher this year, because of both higher usage and higher rates.

Construction of single-family homes in 1977 is expected to match this year's high level. Increases in apartment construction will provide most of the expected rise in total starts. Rising rents are improving prospects for apartment construction. Home mortgage rates have declined with a major lender announcing a reduction from 8.75-9.00 percent to 8.5 percent. Private mortgage insurance is being used increasingly to reduce risks on loans with relatively low downpayments. There are signs of a revival in industrial construction, but mainly smaller projects to be located in "semi-rural" sites.

An exception to the general improvement in the financial situation is related to lower prices for farm commodities and drought-stricken harvests in some areas. Many district bankers report slower farm loan repayments and increased renewals. The greatest incidence of deterioration appears concentrated in Iowa, Wisconsin, and Michigan.