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Chicago: January 1977

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Beige Book Report: Chicago

January 13, 1977

The economic outlook in the Seventh District continues to improve, overall, although demand for some types of consumer goods and producer equipment remains poor. Sales of general merchandise stores in the Christmas and post- Christmas periods were excellent and exceeded expectations. Inventories are generally in good shape. More firms are attempting to raise prices as market conditions permit. There are signs of renewed strength in capital spending and nonresidential construction. All classes of lenders have ample funds to invest and mortgage terms have eased.

Business and financial executives are in virtually unanimous agreement that total real growth and general inflation will be about the same in 1977 as in 1976. Moreover, a very large proportion expect that their own sectors will share in the improvement. In part, more confident attitudes reflect increases in sales and encouraging economic news, but there is also less concern that governmental policies will create an unfavorable environment, e.g., a return to price controls.

Large general merchandise stores were very pleased with Christmas sales which were "above budget" in most cases. A favorable trend has continued in early January. Inventories "on hand and in sight" are "lean" and markdowns of standard merchandise have been less common than is usual at this time of year. Among the lines which have been most vigorous are consumer electronics, microwave ovens, dishwashers, recreational equipment, and auto parts. Sales of fashion apparel have been somewhat disappointing, and sales of color TV sets are reported to have slipped recently with a resultant buildup of inventories. District producers of TV sets are very disturbed about "unfair" Japanese competition which is taking a much larger share of the market.

A larger retailer expects its sales to rise 8 percent in 1977—9 to 10 percent if consumer taxes are reduced. Prices of general merchandise average about 4 percent above year ago. One large retailer believes that the prices it pays and receives will rise about 3.5 to 4.5 percent in 1977. Another retailer has raised its estimate of the prospective price rise from 4.5 to 4.8 percent. Various retailers and manufacturers report an increase in the number of suppliers who are trying to push through price increases, following the lead of steel.

A gas utility serving 1.3 million customers in Northern Illinois now predicts that home heating bills will average 45 to 50 percent higher this winter because of higher rates and colder weather. A month earlier an increase of 35 to 40 percent had been predicted. December was 35 percent colder than year ago and 23 percent below normal. Gas supplies in the district are expected to be adequate, unless the federal government orders diversions to other areas, a step that would be strongly opposed.

A local steel company reports an increase in orders for flat-rolled products, especially from auto companies who are paying "full price" despite some publicity to the contrary. Steel shipments are expected to rise 11 percent in 1977 to about 100 million tons. Inventories of steel users and steel service centers have been reduced to desired levels. The precise level of steel shipments in 1977 will depend on the volume of imports, mainly from Japan, which is expected to increase.

Most analysts now expect sales of both cars and trucks to increase in l977—to a new record in the case of trucks. Sales of recreational vehicles are also expected to show another large rise. The sharp contrast between very poor sales of small cars and strong sales of intermediate and standard size types continues. The smallest auto company, which produces small cars almost exclusively, admits to a very precarious financial position. It is feared that this company's Milwaukee plant will be closed down for good. This company hopes to escape the full impact of the labor settlement agreed to by the large auto and farm equipment producers, valued at 13 percent for the first year.

Demand for farm equipment has fallen off, and a decline in sales is expected for 1977. Bankers note a buildup of farm equipment inventories in the hands of dealers, including the heaviest tractors, which had been on allocation until recently.

The capital spending picture is somewhat better. Orders for mining equipment have picked up again after a slowdown. The major auto companies have expanded their plans, already large, to purchase equipment to produce redesigned models. A producer of controls and components, in a strategic position to evaluate trends, believes that various major projects kept on the "back burner" by the food processing, paper, chemical, and glass industries will be activated this year. There are early signs of such a trend, which is expected to be more clearly evident in the second quarter. Sales of environmental control equipment have been very strong all along. Producers of capital goods and related components have ample reserve capacity to handle new orders, having solved most of the bottlenecks that limited output in
1973-74.