Beige Book Report: Chicago
June 14, 1978
Concern over accelerating inflation is uppermost in the minds of many businessmen, lenders, and consumers. Some analysts are apprehensive that imbalances associated with the payments deficit, sharply rising prices, higher interest rates, and reduced availability of funds will slow or reverse the economic expansion early in 1979. Tighter mortgage credit has already had an impact on residential construction, but nonresidential construction is showing new strength. Demand for capital goods is generally vigorous. Job markets are very strong. Consumers are spending freely. Farmers have made rapid progress with plantings after a late start.
Any assessment of the impact of the 6-month "T-rate" certificates, permitted since June 1, must still be tentative. Institutions offering these instruments are paying maximum rates. Promotions have been aggressive in Chicago, Indianapolis, and Des Moines, variable in Detroit, but nonexistent in Milwaukee. In general, the largest banks and S&Ls have taken the lead. Reports from Chicago and Detroit indicate that response, so far, has been less than expected, with a large share, perhaps 60-90 percent, of the funds transferred from existing deposits. Bankers describe the movement as "defensive," i.e., helping to prevent deposit outflows. Many fear that competition for T-rate CDs will raise costs without commensurate benefits in terms of deposits.
Uneasiness over the duration of the expansion is not supported by new signs of weakness in demand. Purchasing managers in Chicago and Milwaukee report output, employment, orders, backlogs, and inventories rising faster than a few months ago. Recent readings on some data are the strongest since 1973 or l974.
Price increases in wholesale markets appear to be averaging over 7 percent on an annual rate basis. A wide variety of commodities and services are involved—steel, aluminum, castings, leather, glass, packaging materials, chemicals, and fasteners are mentioned. Not all announced price increases are holding up, at least not in full. Order lead times are lengthening, but there are very few serious shortages. Placing customers on allocation, widespread in 1973-74, is unusual in today's markets, except for building materials. Problems in obtaining a variety of building materials are likely to ease later in the year, if housing starts decline as expected.
Limited availability of skilled workers is a frequent complaint. All metalworking trades and clerical workers, such as secretaries and typists, are mentioned most frequently. Help-wanted advertising is very heavy.
Another problem area is transportation. Movement of goods in and out of plants is hampered by availability of freight ears, locomotives, and highway transport. Orders for new freight cars, locomotives, and other railroad equipment are causing a buildup of backlogs. Forecasts of sales of heavy trucks for 1978 have been raised again recently, and the year may set a record. Some railroad car builders have converted plants to produce hopper cars, auto transports, and lumber flat cars.
All fuels are in adequate supply. Various natural gas utilities are adding commercial and industrial customers again, after a lapse of several years. A prominent petroleum analyst is greatly disturbed by reports that the DOE is seriously considering use of quotas to cut imports of oil by two million barrels per day. Even a cut of one million barrels (less than 5 percent of total supply) would soon cause "utter chaos." Apparent surpluses of oil products are really quite thin.
In the Chicago area, new permits for both homes and apartments were well below year ago in April. As a result, the four month total also was down. This trend is expected to continue. The rate on standard conventional mortgages is now close to 10 percent in the Chicago area, plus two or three points. Higher rates alone do not seem to deter inflation-conscious home buyers. S&Ls have restricted new loans to established customers, to owner-occupied homes, and by raising down payments. The trend toward condo conversions continues unabated, thereby increasing demand for mortgage loans. Prices of existing condos are rising more rapidly than in past years.
Steel firms in the Chicago area report a good order book for the third quarter. One company is operating above its rated capacity. A larger share of steel orders is for structural steel and equipment, which are in a "long overdue expansion." Important industrial, utility, and mining projects are reported to be in the early stages of design and construction. Steel imports are believed to have dropped sharply after May 1 when "trigger prices" became fully effective. However, much of the record volume of steel imported in the first four months is believed to be still in the hands of distributors.
Our information on business capital spending suggests greater strength than was indicated by the most recent DOC survey. Figures on bidding volume and new plans are up sharply. Outlays by the auto industry to produce more efficient cars and trucks will be enormous for years to come. New commercial construction is showing substantial strength. Demand for equipment for rail and motor transport is excellent. Orders for machine tools, industrial presses, castings, forgings, diesel engines, and various components are all far ahead of last year. Most of these companies report business to be "very good," but still not comparable with the 1973-74 boom. Construction machinery is another strong sector, particularly smaller types. Farm equipment sales will be down this year, but by a smaller proportion than had been expected earlier.
With improved weather in late May retail sales picked up on a broad front. A growing share of total sales seems to be going to the larger, more aggressive chains. Not all car models have been selling well, but overall sales have exceeded expectations in recent months. Sales of recreational vehicles and light trucks have been stronger than autos with some models "sold out." Regional polls report deep consumer pessimism, but consumers appear to be buying big ticket items aggressively.