Beige Book Report: Chicago
December 14, 1977
As the year draws to a close, virtually all informed observers in the Seventh District are confident that the expansion will continue well into 1978, perhaps through the year. Retail sales have been at satisfactory levels, and inventories are generally well balanced. Price increases in many industrial markets have been restrained by competition, but the underlying trend is still strongly upward. Orders for steel have improved. The capital goods sector continues to improve with a bigger boost from nonresidential construction. The agricultural sector remains weak with some optimism generated by the recent rise in grain prices. Credit is generally available, but some rural banks are hard-pressed to accommodate farmers who have been forced to renew loans.
Professional forecasters in the district have predicted increases in real GNP for next year ranging from 3.5 to 5.5 percent. No one seems to be forecasting a recession. Most expect price inflation to accelerate somewhat next year for various reasons including: a bottoming out of farm prices, moves for protection, the higher minimum wage, increased social insurance taxes, rising wages, and higher income supplements—both private and public. Views differ on the desirability of a large reduction in federal taxes. Some professional forecasters believe that a substantial tax cut is necessary to sustain the expansion, while others, probably more numerous, believe that a cut of $20 to $25 billion is not large enough to make a significant difference in a $2 trillion economy.
Sales of general merchandise were adversely affected by extremely cold weather in the first third of December, but prospects for the Christmas season remain excellent. Sales of soft goods had begun to improve relative to hard goods in October and November, but hard goods—especially appliances, home improvement items, and auto parts—continue to show the largest gains. Some retail executives believe that recent heavy use of installment credit will moderate. Nevertheless, delinquency experience continues to be excellent. The use of bank cards continues to expand with another department store chain added to the list of users.
The airlines have been pleased with larger than expected (10 to 12 percent) increases in traffic over year ago starting in October. Only part of the gain can be attributed to cut-rate fares on certain routes.
Recent adjustments in auto production schedules clearly reflect sales falling short of expectations. Success of the new smaller models, in doubt at present, is necessary if 1978 sales are to equal or exceed 1977 as auto executives have predicted. There is greater confidence that sales of light trucks will continue at high levels. All makes have expanded capacity to produce vans, which have been in short supply. Sales of heavy-duty trucks and trailers continue on a plateau, and at least one maker has cut production.
Orders for capital goods continue to expand overall. Sales of virtually all types of farm equipment have been far below year ago levels, however. Among the strongest capital goods sectors have been components: castings, fluid power, mechanical and electrical drives and controls, bearings, and electric motors. Some producers of these items report that inquiries suggest a shift toward larger projects for expansion and modernization, as opposed to orders for off-the-shelf items for replacement and maintenance. Manufacturers of capital equipment, except for some specialties, have expanded capacity substantially since 1974, and could accommodate additional orders.
Steel orders began to improve in November and order books are filling up for early 1978. Pressure to curb imports and possible shortages resulting from extended coal/ore strikes may be temporary factors. A major district producer, however, cited an improvement in orders for plates, bars, and structurals, which are associated with a rise in capital goods production.
Prospects for nonresidential construction continue to improve. Except for the auto industry, planned industrial projects are relatively small, e.g., light manufacturing and distribution centers. Plans for new office buildings and hotels are significantly stronger in the Chicago area, both in the Loop and in favored suburbs. Retail store construction also is picking up in the district, but only for smaller "community" shopping centers. No large "regional" centers are needed in the near future. Some huge "closed mall" type shopping centers still are not operating at planned levels.
Residential construction should be at a high level again in 1978. Sales of new and existing units continue strong with prices 10 to 12 percent above year ago. More and more existing apartment buildings are being converted to condominiums. Apartment construction is picking up, but on a highly selective basis. Rents will have to rise substantially further to justify major rental projects because rising costs of construction and operation are out-pacing rents. The rise in construction labor costs has moderated, but prices of lumber, insulation, and other materials are up 20 to 50 percent from year ago.
Although incomes of grain and livestock farmers have been sharply reduced, to the point of bankruptcy in some cases, the agricultural picture is not all bad. Fruit and dairy farmers have had good to excellent results this year.