Beige Book Report: Chicago
August 10, 1977
Although clouded by plant-wide vacation shutdowns and other seasonal developments, Seventh District business activity appears to be trending upward, but probably at a slower pace than in the second quarter. Retail sales of consumer hard goods have been excellent, while apparel sales have lagged expectations. Order lead times have lengthened moderately on average. However, except for residential building materials, shortages are not hampering output. Strikes in the steel, coal, and iron ore industries pose a serious threat. Upward price pressures remain strong. With some notable exceptions such as heavy trucks, the improvement in demand for capital goods has not matched forecasts. Crop prospects deteriorated in some parts of Iowa in the past month. The surge in farm-land prices slowed in the second quarter. Lower crop prices have disturbed some rural bankers.
Retail sales of cars, light trucks, appliances (especially refrigerators and air conditioners), sewing machines, auto parts, and various hot weather merchandise have been excellent. However, sales of apparel, especially "fashion goods," have been "below budget." Two very large general merchandise firms reported July sales to be about 20 percent above year ago. This large gain partly reflects more aggressive merchandising. Sales of these chains were relatively poor in July 1976.
Chicago purchasing managers reported further gains in output, new orders, inventories, and employment in July, but with somewhat smaller margins than in May and June. Delivery lead times slowed somewhat further. Two-thirds of the companies reported paying higher prices, compared to three-fourths in earlier months.
Few companies are currently concerned about shortages of purchased materials. In home building, however, construction delays are reported because of slow deliveries of insulation, bricks, dry wall, and plumbing fixtures. Shortages of skilled workers—especially carpenters, but also bricklayers, plumbers, and operating engineers—are impeding some jobs. Homebuilding activity, therefore, is at virtual capacity. In part, this reflects the late start caused by the severe winter, but also the fact that some suppliers and tradesmen left the industry during recent years of reduced demand. Mortgage credit availability appears to be ample.
A local steel company lost orders for sheet from auto producers because of a recent strike threat, now resolved. This episode reveals the pressure placed on suppliers to meet demands in labor disputes. Although steel producers have a three-to-four month supply of iron ore pellets, continuation of the recent strike at the Minnesota iron mines could have a serious effect on steel output if stocks are not rebuilt before ice halts Lake Superior traffic.
During the July heat wave the electric send-out of the utility serving the Chicago area topped the 1976 peak on seven occasions. The new peak was up 8 percent. Maintenance was a problem as generating units "tripped out" temporarily. A New York-style blackout is believed to be remote in Chicago or other district areas because of lesser dependence on purchased power and many more interconnections with neighboring systems.
The recent depreciation of the dollar relative to foreign currencies is helping U.S. steel and equipment producers who must meet competition from Germany and Japan. The effect appears to be more through holding down imports, rather than through increasing exports.
Business managers are displeased with the energy program that appears to be shaping up in legislation now under consideration. They insist that incentives to develop new supplies are inadequate and that proposed measures to reduce consumption would be inefficient and vary costly to implement.
While capital equipment output appears to be rising overall, demand for heavy capital goods related to capacity expansion remains sluggish. Sales of most types of farm equipment are running below last year. Heavy trucks, trailers, light construction equipment, and various components are relatively strong. Sales of energy-related equipment are good, but not up to expectations. Orders for machine tools, especially those for auto companies, are well above last year and further gains are expected in 1978.
Recent declines in crop prices have caused concern at district agricultural banks. While deposit growth has slowed, loan demand (primarily for operating and crop storage loans) remains exceptionally strong. Nearly 40 percent of banks surveyed consider their current loan to deposit ratios to be above the desired level, the highest proportion in five years. Evidence on loan repayments and loan renewals suggests further deterioration.
Although a large corn crop is anticipated, growing conditions vary greatly from area to area. While conditions in Illinois are generally excellent, crops in some portions of Iowa are in very poor condition.
Our survey of 600 agricultural banks shows a marked slowing in the surge in farmland values in the second quarter. Prices averaged 4 percent higher, compared to an 8 percent gain in the first quarter. Illinois, which had placed the uptrend for the past two years, showed approximate stability in the second quarter. Nevertheless, farmland prices at midyear averaged 30 percent above last year.