May 10, 1978
The business expansion in the Seventh District continues on a broad front, and with a minimum of disruptive influences. Concern is growing that price inflation is proceeding at a faster pace. Consumer spending is strong overall, but cold, damp weather has held back sales of seasonal merchandise. Capital expenditure prospects have strengthened, with a growing boost from nonresidential construction. Demand for mortgage credit is "intense." The financial position of the farm sector has improved.
Business and financial executives are worried over inflation (apparently accelerating), increasingly onerous government regulations, the federal deficit, the trade deficit, and other national and international problems. Somewhat surprisingly, virtually all executives expect improvement in the sales and profits of their own enterprises. Many expect the expansion to level off or turn down in 1979, but the signs are not yet evident, except perhaps in the residential mortgage sector.
New hiring continues at a good pace in most centers. Complaints are increasing, however, over the quality of job applicants, especially for jobs requiring acquired skills.
A number of large general merchandise chains in the District report that sales of seasonal merchandise have fallen short of expectations in the past several weeks. This is attributed partly to bad weather and partly to the aggressive pricing and promotions of a very large national chain. Big ticket items are generally selling well, including appliances, furniture, autos, and light trucks. Demand for installment credit is very strong, and availability appears ample. Telephone utilities report a large rise in new installations and toll calls. Airline traffic continues to exceed forecasts made early in the year, for full fare as well as discount traffic.
Orders for capital goods have improved fairly steadily since the start of the year, and backlogs have been building—to record highs for some firms. Among the strongest sectors are heavy trucks, freight cars, machine tools and equipment for construction, materials handling, lumbering, and communications. Among the weaker sectors are farm equipment, large mining shovels, draglines, and environmental systems—the latter affected by a lag in availability of federal grants.
Nonresidential construction activity is picking up, mainly for commercial but also for industrial buildings. Leasing of vacant commercial structures has been picking up rapidly "throughout the country." Ten large office buildings in Chicago's Loop are now underway or will be started this year. Activity is also very strong in some far-out suburban areas. Other large district centers do not match Chicago's performance.
Inflows of savings to S&Ls improved in March, but were down 60 percent from a year ago in April. The standard mortgage rate in the Chicago area is now 9.75 percent, plus 2 to 3 points, with some S&Ls at 10 percent. The mortgage terms picture has changed rapidly in the past several weeks. Some S&Ls have adopted a "customers only" policy. With the help of FHLB loans and sales in the secondary markets, mortgage volume on both new and used homes may be as large as last year. This would mean fewer units, however. The market for single-family homes is called "phenomenal," and availability of rental units is low, partly because of condominium conversions.
Farmers made considerable headway in spring field work last week, but overall progress-to-date is about three weeks behind normal. Heavy rains this weekend point to further delays.
District farmland values rose nearly 4 percent in the first quarter. Very few agricultural banks note an increase in land purchases by foreign investors.
Incomes of district farmers have been boosted by the 7-month rise in prices of feed grains and livestock. Farm loan repayments improved further in the first quarter, although the rate is still somewhat slow. Loan-to-deposit ratios at rural banks rose to a new high. An unusually high proportion (44 percent) of the banks are operating with higher-than-desired ratios.
Steel demand is the strongest since the expansion began. One producer expects to operate at capacity through June. A larger share of steel shipments is for capital equipment and nonresidential construction. Steel warehouses appear to be turning away from imports, apparently expecting higher prices and/or problems of availability.