October 11, 1978
The uptrend in business plant and equipment spending appears to have taken the leading role in the expansion while consumer spending has moderated. Pessimism is widespread among executives, lenders, and consumers, but no significant general weakening is expected through year end. Employment continues to rise. Housing activity continues to exceed expectations, but the market appears to be softening. Meanwhile, nonresidential construction is picking up speed. Record corn and soybean crops are expected.
Recent increases in short-term interest rates have convinced some observers that a slowdown or recession is inevitable next year as tighter credit policy begins to "bite." Tighter policy is accepted by most executives as necessary to slow inflation, except for those in the housing industry. Some executives state privately that wage and price controls lie ahead, despite disavowals. They believe associated market disruptions will endanger economic growth.
Comments on the proposed natural gas bill, which is expected to pass, are highly critical. The extremely complicated measure will create a "bureaucratic nightmare." Regulation of intrastate sales of gas is expected to increase interstate shipments and slow needed shifts to other fuels.
Although results vary by store, total retail sales appear to have advanced at a slower pace in the past month or two. Weakness has hit major appliances, especially refrigerators, freezers, washers, and dryers. Production has been cut back.
Despite a disappointing rate of sales in September, the market for motor vehicles is still believed to be strong—in the 15 million per year range. Some models of cars are in short supply. The recent rail strike cut 45,000 autos out of September schedules. (A long strike obviously would be disastrous.) Auto makers are boosting prices on large cars in greatest demand, while they hold the line on small cars, to help meet CAFE mileage requirements. Experience with 42 and 48 month car loans has been very good. Even longer terms are under experimentation.
Overall, the producer goods sector looks stronger than earlier in the year. Output schedules for diesel engines, heavy trucks, freight ears, and construction equipment have been increased. Machine tool backlogs stretch well into next year. Bottlenecks are largely restricted to castings and skilled labor. Some companies would add shifts if enough skilled workers and managers were available. A large auto firm reports that over 90 percent of its large capital outlays are for mandated fuel and emission standards, rather than for expansion, or even better productivity.
Commercial and industrial construction activity is expanding. Office building construction in Chicago is in a full-fledged boom. New plans have been announced for luxury apartments and large hotels. Building in industrial parks is accelerating as vacant space declines. Two large regional shopping centers have been announced for the Chicago area, the first in. several years.
The cement shortage has remained serious. Ready mix plants have been operating on short weeks. Sizable public and private construction projects have been slowed, or even postponed, because of concrete allocations. The situation is particularly severe in the Chicago area, because the Illinois Waterway has been closed for repairs, the normal channel for many barge shipments of cement and aggregate. Alternative transportation is judged prohibitively expensive for large users.
Record crops of both corn and soybeans are virtually assured. Despite late plantings, harvesting is on normal schedules. Many farmers will need private credit to carry harvests. Only 25 percent of corn production in Illinois is eligible for CCC loans. The proportion is 4.5 percent in Iowa and 30 percent in Indiana.
The "pack" of fruits and vegetables has been below expectations. Pork production is lagging despite apparent high profitability. These developments suggest continued upward pressure on food prices next year.
A major steel producer sees no sign of demand weakening as it did last year. In fact, order lead times have extended into January on cold-rolled sheets for the auto market. (Steel needs for autos will decline next year because of downsizing.) Orders for structurals and plates are improved, but lead times have not extended. More steel is going to service centers, which mainly supply the construction and equivalent industries.
Transactions in homes appear to be declining as a result of higher prices and continued high interest rates, which eliminate more and more buyers. Homes priced at $100,000 or more and lower-priced homes in less desirable locations are selling more slowly. After easing in midsummer, mortgage availability tightened up again in September. S&Ls are able to attract funds through MMCs, but they are increasingly uneasy about their growing dependence on such high-cost funds.
Demand for labor continues strong. Executive placement firms are doing a huge business. This year's college graduates had the best choice of jobs in several years. Unemployment claims continue below year ago in most areas. Surveys of hiring plans show that more firms expect an increase in employment than a decrease. Help-wanted ads in Chicago newspapers are running close to 30 percent above year ago, a wider margin of gain than in earlier months.