Beige Book Report: Chicago
April 12, 1978
Informed observers in the Seventh District expect no downturn in general activity before 1979 at the earliest. Accelerating inflationary pressures are seen as the greater danger. Sales of autos, farm equipment, and housing starts, however, are expected to decline. The direct effects of the hard winter and the long coal strike are being overcome rapidly, but higher costs were incurred to maintain production. The coal pact is deemed inflationary in itself, and also because of its effect on other negotiations. Retail sales are generally favorable, but strength varies both by product and among retailers. Capital expenditures continue to rise at a good, but unspectacular, pace, with much variation by product. Airline travel has been well above projected levels. Railroads are having serious problems moving goods. Demand for steel is vigorous again. Housing starts are expected to decline, but nonresidential construction is certain to rise substantially. Mortgage credit terms have tightened further. Business loan demand is now clearly on the uptrend. Farm income prospects are brighter because of higher prices for crops and animals, and concern over farm credit has lessened.
The coal strike directly affected activity (other than mining and transportation of coal) in the District only in Indiana, and even there the impact was slight. Some companies were able to maintain production despite shortened workweeks. Many companies incurred additional expenses, however, especially for self-generated power.
The generous labor settlement in the coal industry presages emulation by other unions. Observers here are disappointed that mine operators were not able to reassert better control over productivity, which has been declining in recent years in union mines. A new pact for Chicago CTA bus drivers boosts pay to $8.63 per hour now, with further gains in benefits over two years—plus an uncapped, quarterly COLA clause.
The rail unions are working without a contract and any new pacts will be costly. As in the case of coal, the railroads have been having trouble maintaining productivity, particularly the Eastern roads. Movements of grain and other commodities have been hampered by "critical" shortages of hopper cars and, on some lines, locomotives as well. Problems caused by poorly maintained trackage are widespread. Orders for freight cars and locomotives are strong. Some plants have been converted to produce hopper cars.
It is difficult to generalize on retail sales from varying reports of individual retailers. "Fierce" price competition on general merchandise is hurting some chain stores. The strongest product lines are auto parts, home improvement items, and appliances.
Sales of pickup trucks and vans continue to lead other motor vehicles. The recreational vehicle market has been weak, but the industry expects a rise in sales for the year as a whole.
Airline traffic has been well above projected trends with gains of 10-12 percent over year ago. Orders for larger aircraft and more efficient aircraft will remain strong.
Orders are running 15-25 percent above last year for various diversified capital goods producers. Strength in capital goods is also indicated by large gains in orders for electrical and mechanical components, castings, and steel plates. Construction equipment is the star performer, especially smaller units. One large producer of earth-moving equipment is said to be operating at virtual capacity. Lead times on machine tools have been lengthening. Shortages of skilled workers, e.g., machinists and welders, help sales of sophisticated machines. The fall in the dollar is helping capital goods producers, both by encouraging exports and by discouraging imports. Nevertheless, most capital goods producers could handle a substantial rise in volume. Most have not increased employment or overtime, preferring to let backlogs build up. Capital outlays by the two largest motor vehicle producers are projected to remain very heavy for several years to come, with new plants accounting for a larger share of total spending.
Steel orders have improved in recent months. One company expects industry shipments to reach 97 million tons this year, up from 91 million tons last year with imports down 3 million tons. Lower imports, the need to replenish inventories at both the mill and user levels, and a pickup in equipment needs provide the basis for optimism. (One leading steel producer is operating at near capacity rates.) Sales of steel to the auto industry are expected to decline, however, because of both lower production in units and a lower average weight per car.
Improved auto sales in March encouraged producers to increase output schedules of their more popular models. Inventories will be ample in the peak sales months ahead. Although the winter's gloom is over, most forecasts for auto sales this year are lower than last fall.
The desire for better gas mileage is expected to increase the speed of replacement of the existing stock of cars in the next few years. Some experts believe that a sharp curtailment of oil imports, however caused, would soon require gas rationing, which, in turn, could lead to panic buying of smaller cars, as in early 1974.