Beige Book Report: Chicago
February 21, 1978
The big economic news in the past 30 days has been the impact of severe weather on sales and output. Strike-depleted coal reserves of electric utilities are requiring power usage restrictions in Indiana. Retail sales were strong prior to mid-January when the storms began to take their toll. But sales are expected to snap back as weather improves. Inventories are generally on the low side. Prices of manufactured goods are rising more rapidly. Demand for capital goods continues to increase overall. Orders for steel have improved since December. Mortgage credit is tightening, and home starts are expected to decline in 1978. Farm credit conditions have improved slightly. The recent rapid rise in hog prices reflected a surprising decline in marketings.
Bad weather hampered sales and output in much of January and February to a greater extent than in any previous winter in memory. Heavy snow, ice, and high winds caused widespread worker absenteeism, particularly in Illinois and Indiana. Activity was affected in the retailing, construction, manufacturing, and service industries. Trucks often were unable to move, at least not at normal speed. The railroads also had problems with widespread freight car shortages. Heavy ice on the waterways has drastically slowed or halted traffic. A record number of airline flights were canceled. Among the industries affected significantly by weather were steel, paperboard, motor vehicles, and appliances. In all cases losses in sales and output caused by weather are expected to be recovered in the months to come.
Electric utilities serving most of the district will be able to supply their customers despite the long coal strike. This is because of large starting stockpiles, and heavy use of western coal and nuclear power,. Problems are mounting in Indiana, however, except for the steel producing area at the foot of Lake Michigan. Strike- affected utilities in the rest of Indiana have requested a sharp cutback in lighting. Mandatory cutbacks for large industrial users are expected shortly. Some factories can supply a portion of their power needs from self generation. But power cuts of 50 percent or more would shut down or curtail the operations on a massive scale. Many district manufacturers with ample power available emphasize that they are dependent on components made in Ohio and other power- short areas.
Large retailers were very pleased with sales prior to mid-January. Snow and blizzards since then have had an unprecedented impact on volume. Customers and clerks often could not get transportation, and deliveries of merchandise were hampered. Some winter-related items are now in short supply. Rising incomes and evidence of consumer optimism (despite some surveys to the contrary) probably assure a rapid rebound in sales as weather improves. Prices of general merchandise are expected to rise 4.4 percent on average in 1978, somewhat more than last year. Airlines credit discount fares with large gains in passenger traffic, weather adjusted.
Bad weather and strikes have reduced motor vehicle output substantially in the past 30 days. In part, these output cuts merely substituted for layoffs which would have been required to hold down excessive inventories of cars and trucks. Temporary shortages of models that have been selling well are expected, however.
Steel orders have increased in recent months. One company projects 1978 shipments at 97 million tons, assuming a 3 million ton cut in imports. Auto company orders are down, but orders for plates, bars, and structurals for capital goods are up. Orders have also increased at steel service centers. Weather problems on deliveries reduced shipments 10 percent in January. Coking coal supplies are adequate if the coal strike ends by April 1. User inventories of steel are believed to be very thin.
Although there are important exceptions, demand for capital goods, overall, has continued to improve. Construction equipment is the strongest sector. Farm equipment continues very weak, but one tractor plant has reopened as scheduled after a January layoff. Producers of castings, axles, transmissions, valves, controls, motors, and other components sense that demand for most types of equipment is rising. Design-engineer companies that handle major long-lead time projects say that their workload has increased in recent months, after a long dry spell, and they find the outlook "very promising."
Demand for homes has held up well in recent weeks, in view of severe weather. Nevertheless, analysts anticipate a 10 percent decline in starts in 1978 to about 1.8 million (with a drop in singles more than offsetting a rise in apartments) because of recent and prospective disintermediation. S&Ls around the district say that net inflows of savings have been "below expectations" this year. The average drop from a year ago was 30 percent in the Chicago area, but much more at some institutions. Some officers in downtown areas reported "red figures." Interest rates have increased by as much as a half percentage point in the past two months, and are now in the 9 to 9 3/8 percent range on 20 percent loans. Further increases in rates are expected. This week some S&Ls have tightened other terms by reducing maturities and by increasing fees. Some are limiting new loans to single-family owner-occupied dwellings. Borrowings at the FHLBs are up significantly. Commitments have been made more cautiously in recent months, and fees have been charged more frequently. Despite the points cited above, no drastic curtailment of new loans is anticipated unless disintermediation accelerates sharply.
Our survey shows that farmland prices increased moderately in the fourth quarter, offsetting a decline in the third quarter. The increase for 1977 was 13 percent, smallest since 1972. Credit conditions at rural banks improved slightly in the fourth quarter, halting the rapid deterioration of the third quarter. Higher crop prices in recent months reflect, in part, a record movement of grain under CCC loans. Margins of livestock producers have improved as prices rose in recent months. The very rapid rise in hog prices since year end has surprised most analysts. Hog marketings have been well below expectations. Partly this may reflect weather conditions, but earlier projections of a 5-7 percent rise in hog slaughter in the first half are being scaled down.