Beige Book Report: Chicago
January 11, 1978
Most economic sectors in the Seventh District still appear to be expanding, and sentiment is generally favorable that growth will continue into the second half of 1978. Production schedules for autos and farm equipment have been reduced, however. Retail sales of general merchandise have been very strong. Inventories are generally on the slim side. The slow but steady uptrend in total capital outlays is continuing. Favorable weather, until this week, has permitted outdoor construction activity to continue later this winter than last. Mortgage credit terms are tightening moderately.
Virtually all general merchandise retailers report that sales exceeded optimistic budgets, not only in the Christmas season, but since Christmas as well. Inventories are "on the slim side. "January "clearance" sales have emphasized special purchases rather than markdowns of regular stock. Sales of most lines have been at high levels, with home furnishings, including appliances and furniture, especially good. Consumers have used credit freely but "with prudence." A University of Michigan survey showing consumer confidence "at a two-year low" in December baffles local retail analysts.
Large retailers expect their selling prices to average somewhat more than 4 percent higher in 1978, about the same as the rise in 1977, with soft goods up more than hard goods. Purchasing managers for industrial and commercial companies expect the prices they pay to rise 6 to 7 percent on average in 1978, also about the same as in 1977. Prices of some commodities have been held down by stiff competition. But utility rates are 10 percent or more above year ago levels, while costs of insurance, transportation, and professional services probably have increased even more.
Auto companies have been cutting production schedules for the first quarter. Sales in December were a distinct disappointment, particularly for the new down-sized intermediates. Sales of heavy trucks also have slowed.
A number of layoffs have been announced in the district's important farm equipment industry, with at least one tractor plant closed for the whole month of January. Sales of farm equipment had been sharply below year ago levels long before the widely publicized "farmers' strike."
The December survey of the Milwaukee purchasing managers shows that 46 percent expect their business to be better in the first quarter than in the fourth quarter, as opposed to only 10 percent who expect it to be worse. For the second half of 1978, 58 percent see business better than in the first half, and only 5 percent expect it to be worse. This is significant because of the heavy emphasis on capital goods production in the Milwaukee area. Also, a high proportion report that their companies' capital expenditures will be higher in 1978. Finally, the proportion reporting higher output and orders was larger in December than in November. Inventories were reduced on average in both months.
Demand for most types of capital goods has continued in a modest uptrend. Foreign demand for US equipment has remained sluggish, however. Among the most confident firms are producers of sophisticated machine tools, often used in mass production processes. The auto industry continues to dominate these orders, but demand from other industries also has improved.
Steel companies expect an improvement in their shipments in the first quarter because of restrictions on imports, low user inventories, and further gains in total usage. However, auto producers probably will reduce their orders for steel. While total steel imports into the US were up about one-third last year, imports into the Great Lakes area rose by over three-fourths. Many of the vessels waiting to exit the Seaway after the scheduled closing date of December 15 had brought in European steel and had delayed their sailings as they sought cargoes for the return voyage.
Relatively favorable weather in December and early January permitted private and public construction projects to continue in a period when outside work had virtually ceased last winter because of severe cold and strong winds. Four new office buildings totaling 3.8 million square feet are underway (or soon will be) in Chicago's Loop, scheduled for completion in 1979. Over 5 million square feet of office space is said to be vacant in the Loop, but large blocks of top notch space are not available.
Most housing experts believe that homebuilding will be strong again this year. Prices are still rising at a 9 to 10 percent pace. Shortages of materials, particularly insulation and sheetrock, are not likely to be resolved in 1978. Limited availability of developed lots, with sewer restrictions a large factor, has held back plans of some builders. Some of the largest Chicago area S&Ls recently raised their basic rates on 80 percent home mortgages from 8.75 to 9 percent. Moderate further tightening of rates is expected. Opinions vary as to whether availability of mortgage funds will limit construction this year. The main question mark is the extent of disintermediation, already noted by some lenders.
Permits for apartment units in the Chicago area in 1977 were about double the level of 1975. Nevertheless, apartments comprised only 34 percent of all units, compared to 58 percent in 1971 and 1972. Suburbs reporting the largest increases in permits in 1977 are generally 30 miles or more from the Loop, and often 6 to 7 miles from public transportation.