Beige Book Report: Chicago
April 12, 1977
The expansion of activity in the Seventh District appears to have been firmly reestablished. Retail sales remain strong for both hard and soft goods. Inventories are in good shape in virtually all sectors. Forecasts for 1977 for motor vehicles, steel, some types of capital goods, and residential construction have been raised since December. Prices are rising somewhat more rapidly. Except for fuel, there are few reports of shortages, currently, but some leadtimes are moving out. Labor markets have strengthened in most areas and many employers expect to increase hirings as the year moves on. Soil moisture conditions have improved "dramatically" throughout the district in the past two months and drought fears are over, at least for the planting period. Some farmers are shifting acreage from corn to soybeans, causing a scramble for seed beans in certain areas.
Virtually all business and financial executives in the district expect that the uptrend in their lines will continue throughout the year. Some are virtually certain of further gains in 1978, but others are pushing "plans" in case demand declines. There are more than the usual complaints about uncertain government fiscal and regulatory policies and specifically about rising costs of unemployment compensation, workmen's compensation (especially in Illinois), and product liability insurance which is especially costly for small firms.
Reports of purchasing managers and other statements indicate that inventories, output, employment, new orders, backlogs, and prices charged by vendors have been rising moderately on a broad front in recent months. Pressing shortages are rare, but leadtimes on orders are stretching out and some buyers complain of deterioration in product quality and delivery dependability. There is apprehension over supplies of coated paper, certain types of bearings and castings, building materials such as gypsum board and lumber, and, of course, fuel of all types.
Major retailers continue to be pleased with sales of most classes of merchandise. Credit purchases have increased relatively, and delinquency experience has been favorable. Inventories are within budgeted limits generally.
Plants making the most popular auto models have been operating on full overtime, but successive shutdowns are continuing for domestic small cars. Demand for light trucks is excellent. Sales of heavy trucks and trailers are expected to move to record or near-record levels next year. No significant shift in the trend to highway transport from rail is considered likely or even feasible, even though shippers have been fairly well pleased with the performance of Conrail and the private lines.
Capital spending on equipment, as opposed to structures, is improving, but many delays or cancellations are attributed to vague or "unworkable" federal and state regulations relating to health, safety, and environment. Other than highway transport, orders have improved for machine tools, outdoor cranes, bulldozers, large front-end loaders, overhead cranes, hoists, and lumbering equipment. Demand for such components as controls, bearings, castings, diesel engines, electric motors, and transmissions has increased and a larger share of new orders is for original equipment rather than replacement. Some equipment makers have increased output to prepare for an increase in orders that they are fairly confident will occur. Many of the bottlenecks that limited capital goods output in 1973-74—engines, axles, transmissions, castings, and controls—are not so likely to cause problems in the future because of increased capacity.
Steel orders have increased significantly since January. Demand is especially strong from the motor vehicle and appliance industries, but orders have also increased for plate, larger-diameter tubes, bars, and containers. Heavy structural steel remains weak, however. Most analysts have raised forecasts of steel shipments for the second quarter and for the year. User inventories are believed to be quite low. Bunching of orders to beat expected price increases could tighten supplies of some types of steel. The apparent agreement on the steel labor pact over the weekend, still leaves a wide assortment of local issues unresolved, and important strikes cannot be ruled out.
A major oil company reports that product prices are inching up in response to strong demand. Barring stoppages of imports, no shortages of oil products are foreseen for the next year or so. Gasoline stocks are currently ample, partly because of increased output that accompanied the all-out effort to produce heating oil. Oil refineries are operating at practical capacity. Increases in capacity are the result of expanding or modernizing existing refineries. The Midwest imports oil products from other districts. Local experts insist that decisions on the transport and processing of Alaskan oil cannot be delayed much longer without serious consequence.
All companies able to do so are pushing programs to improve efficiency of energy use, increase fuel storage capacity, and, especially, to reduce dependence on natural gas. Some are acquiring their own energy sources, e.g., coal or natural gas supplies. An appliance producer that converted several plants from coal to natural gas a few years ago has recently decided to reconvert these plants to coal.