March 9, 1977
Since mid-February economic activity in the Seventh District has returned to relatively normal levels following the most severe deep winter of modern times. Many manufacturers, particularly steel and motor vehicle producers, have been working full speed to overcome shortfalls in output. Many manufacturers and some retailers have begun to rebuild depleted inventories, and order lead times have lengthened, at least temporarily. Retailers continue to report excellent sales of both durables and nondurables. Employment appears to be rising in most areas. Projections of price inflation through year end have been raised. Capital expenditure programs probably have been increased overall, but uncertainties continue to hamper business decision making. Residential construction projections have been increased. Farmers and rural bankers are much disturbed by very low levels of subsoil moisture, but the situation could be corrected by adequate spring rains.
Virtually everyone agrees that losses in output and work time reported in January and February will be largely made up in the months ahead. Activities related to producing, storing, conserving fuel and energy are being accelerated. For example, programs to reduce or eliminate dependence on natural gas by converting heating systems and increasing storage capacity for fuel oil and propane are moving ahead at a faster pace. Companies will be increasingly secretive concerning their fuel resources because of certain unfortunate incidents during the recent crisis.
Indiana was the only district state that had significant layoffs directly because of natural gas cutoffs. The last restrictions on large gas users in Indiana, including the steel mills, were lifted in mid-February, but some companies did not regain normal operations until late in the month. Some output was lost in Michigan, Illinois, and Wisconsin because supplies from vendors were curtailed, reflecting fuel shortages elsewhere, because of transportation problems and other weather-related factors. Much construction work scheduled for the winter was postponed. Damage to roads and other structures from frost is much greater than in past years.
Frozen waterways hampered transport in the district from mid-January to mid-February. The important Illinois Waterway from Chicago to the Mississippi reopened on February 22.
Although there was a tendency to exaggerate the impact of weather on activity, the dangers were very real. If February had been as bad as January, as was predicted, fuel oil and propane shortages could have caused great hardship. Moreover, district utilities feared forced diversions of gas to the East.
The bad winter, rising fuel costs, use of more expensive alternative fuels and transportation, absenteeism, and other related problems have adversely affected profits of many companies. The drift of Midwest industry toward the "Sunbelt" doubtless will be accelerated. A constant refrain among important business executives is that ''now we must have a sensible national energy policy."
Users of natural gas emphasize that some processes, particularly annealing and heat-treating, require natural gas. They urge that these special needs for gas be considered in the future, instead of restricting usage purely on the basis of total requirements. Most interruptible gas users may not obtain usual summer supplies. The real shocker in the recent curtailments was the suddenness with which firm customers were cut off. Some of these companies had entered into more expensive contracts to assure essential supplies.
The auto and truck markets are very strong. Motor vehicle assemblies will be at near-record levels in March and probably in April as well to make up for lost production. Almost one million people attended the Chicago auto show last week and potential customers appeared enthusiastic, at least for the larger more fully-equipped models. Domestic small cars continue to sell very poorly despite inducements, and output has been restricted in a series of steps.
Orders for heavy trucks and trailers continue to strengthen. Unfortunately, one major producer of heavy trucks located in Indiana lost substantial output in February, mainly because of fuel shortages.
Steel orders increased in February, especially from auto companies. Purchasing managers say lead times on steel have lengthened by about a month. Demand for "oil country goods" has picked up sharply, and there has been some increase for other capital goods. Inventories are low. If steel for construction and heavy capital goods also increases, shortages are possible later in the year, despite increased imports from Japan. Trouble for future years may arise from the fact that half of the 25 million ton increase in raw steel capacity scheduled for 1980 has been canceled or postponed.
Demand for housing is very strong, especially single-family homes. Prices of both new and well-located existing homes are increasing about 10 percent per year with no slowdown in sight. Increases in compensation for the building trades moderated last year, but this was offset by more rapid increases in prices of virtually all materials and components. Lumber, gypsum board, insulation, and various housing components may limit production of new units. Credit is in ample supply and this is expected to continue to be true throughout the year. Residential tract developers are becoming active again. Some work has been delayed by bad weather. Industrial plant construction prospects are still poor in this district. Light commercial building activity has improved, however.