December 13, 1978
Despite fears of a recession next year the Seventh District appears to be approaching 1979 with a good head of steam. Order backlogs of capital goods producers continue to rise. Inventories remain generally adequate, but not excessive. Supplies of some items are tight. Employment is still rising. Scattered reports indicate a vigorous Christmas season. Residential construction is almost certain to decline next year, but nonresidential building should rise. Price inflation has not moderated for goods and services, but prices of existing homes are softening. The farm sector is much happier than last year with good crops and higher prices. Lenders say they are increasingly cautious in granting new loans in all major classes.
Business executives, especially in the business equipment fields, seem optimistic about prospects for 1979. There is some concern that predictions of a recession will help bring about such a development. Professional forecasters vary with some predicting a mild recession starting about mid-1979. The more common view is that growth will slow further in 1979, but that a two quarter decline in real GNP can be avoided—at least that it is not inevitable. Chances of slowing the rate of inflation are deemed poor by virtually everyone.
Reports of purchasing managers in the Chicago and Milwaukee areas showed further strength in November with new orders, backlogs, output, and employment all rising. Order lead times lengthened again. The Milwaukee report was even stronger for November than October. Milwaukee is heavily dependent on capital goods production.
Auto sales were somewhat above expectations in late November. Truck sales are generally limited by supplies. General Motors sticks to the prediction that auto and truck sales next year will match 1978. Ford agrees on trucks but thinks auto sales will be down by 300 to 500,000 units. Some GM and Ford cars are in short supply. The other producers have had to cut production schedules in line with disappointing sales.
We are unable to find evidence of an excessive buildup of inventories, except for some types of clothing. A large retailer whose sales have lagged year ago insists it has held orders to a level which has kept inventories in good balance. Output has been adjusted promptly, for example in appliances, when a buildup of inventories was threatened. Large companies are said to have pushed their inventory problems back on suppliers to a greater extent than usual.
Short supplies of cement, castings, and some motors are limiting activity. Steel users say that the steel haulers' strike will hamper their operations if it is not settled soon. West Coast paper strikes continue to pinch supplies in this region.
No final reading on consumer buying during the Christmas season will be possible until the second week of January. Scattered reports indicate that people are spending freely. Air traffic continues to show substantial gain.
Some bankers are screening consumer credit applicants more closely, restricting loans to regular customers in some cases. Despite vague reports of increased delinquencies, a major auto company says delinquencies have been at last year' s moderate level. Half of these auto loans are for 48 months. Michigan utilities say delinquencies are rising, but this is attributed to regulations which drastically curb service cutoffs.
Consumers had been cleaning out dealer stocks of snow blowers, selling in the $250 to $500 range, even before recent heavy snows. District producers of snow blowers and components who are operating all out for three shifts per day cannot satisfy demand. Shipments of over 800,000 units this year will be about double last year's total. Some types and sizes of snow tires are available only after a long wait. Sales have exceeded manufacturers' expectations.
Evidence that labor markets remain tight is offered by reduced unemployment compensation claims, more applications on file at state agencies, a heavy volume of help-wanted ads, and reports of shortages of skilled workers both in industry and construction. Shoppers have complained about inadequate staffing of stores in suburban areas, especially where individual transportation is required. In the Chicago area $4 per hour to start for low skilled help is not uncommon.
Natural gas supplies were adequate in the district last year. This year district experts say the whole nation is in similar shape. One large gas pipeline system has canceled a contract for deliveries from producers because the market is soft. New commercial and industrial customers are being accepted after a lapse of years.
Oil companies are somewhat edgy about supplies of heating oil and gasoline, especially no-lead gasoline. Refineries are operating at capacity. Big companies no longer are able to help out competitors with temporary production problems. A continued flow of oil from Iran, which supplies about 10 percent of US imports, is crucial. It is not considered desirable to publicize tight supply conditions for fear a large proportion of users will fill their tanks and create temporary supply problems. Supplies are deemed adequate, but margins of safety are narrow.
Realtors say that home sales have declined more than seasonally in the last several weeks. Only sales of condos are up because of conversions. High interest rates are expected to cut new residential developments next year.