Beige Book Report: Chicago
August 7, 1979
Although total business activity is probably slipping moderately in the Seventh District, trends are mixed from one sector to another and often within sectors. Weakness in the residential sector is contrasted with strength in nonresidential construction. Most types of capital goods remain vigorous. Consumer spending on lower priority goods and services is sluggish, especially for low mileage vehicles. Demand has eased for steel, nonferrous metals, building materials, and paperboard. Shortages have eased in sectors where demand has declined, but inflation is as strong or stronger than before. Lenders are cautious and selective but credit remains available to sound borrowers. Prospects for farm income are favorable.
Despite level or declining total activity, labor markets remain relatively tight. Reductions in employment have occurred in the motor vehicle and RV industries, but such workers are not readily absorbed elsewhere. Although residential construction is down sharply, experienced building trades workers are in demand for nonresidential projects and repair and modernization.
All eyes are focused on the upcoming UAW/Big Three labor negotiations. Labor's demands and initial company offers are said to be far apart. Some 700,000 workers are involved in contracts expiring September l4, and about as many more will follow their lead. The "word from Detroit" assigns a 30 percent probability to a strike of some duration, but such guesses have proved to be of little value in the past. Aside from heavy demands for compensation, many local issues and the prestige of various personalities present roadblocks to a timely settlement.
Most unions representing private and public workers are emphasizing demands for full COLA adjustments plus other contract "improvements." Automatic COLA adjustments are raising many incomes each month. (The Teamsters will get a further 5 percent pay boost in October.) Some contracts are tied to local CPIs, despite problems of accurate measurement. The national CPI was 10.9 percent above year ago in June, but the Chicago index was up 12.1 percent. The Milwaukee bimonthly index was 15.1 percent above year ago in May.
Consumers turned cautious in recent months—particularly on purchases of large cars, trucks, and RVs. They are spending more on goods and services used at home. Demand for bicycles and roller skates is straining capacity. Discount stores and catalog sales are doing relatively better than the traditional retailers. Some tourist areas have been hard hit, but those closer to population centers have done well. Airline travel has leveled off after very rapid growth aided by fare cuts. Slowing sales of fast food chains are attributed to fuel stringencies, higher prices, and market saturation. Some bank credit card plans and some individual banks report increased consumer delinquencies, but big retail chains and big auto finance companies observe little or no deterioration.
Supplies of gasoline and diesel fuel have improved. Hours of some gas stations have been extended, but the situation is still far from what had been normal. Higher prices (in the Chicago area gas is generally $l and up) and continued concern about availability have curtailed longer auto trips. Improvement in availability of diesel fuel, at much higher prices, partly reflects a significant fall-off in tonnage hauled by truck.
Local oil experts believe that "serious" oil product shortages will be avoided through year end assuming (1) no new disruption of supply, (2) continued conservation, (3) a leveling or decline in general activity, and (4) freedom for market forces to work. Natural gas availability is believed to be adequate assuming a normal winter and the absence of a stampede by industry to convert back to gas from oil. Heavy residual fuel is in good supply. Prices of all fuels will move up further from current levels, even if no new boost is decreed by OPEC. A move is gathering strength to subsidize fuel bills of lower income families on a broad scale. Public transport charges are almost certain to rise substantially soon.
Aside from retail trade, industries that have noticed a slowing in demand lately include steel, nonferrous metals, airlines, trucking, motor vehicles, and paperboard. Inventories had not been excessive overall, but new buying has become increasingly cautious. Forty percent of the Milwaukee purchasing managers, many capital goods oriented, reported new orders in July to be lower than in the previous month, compared to 20 percent reporting higher orders. The proportion reporting lower order backlogs in both June and July was twice as great as the number reporting higher backlogs, thereby reversing their reports for May 1979 and July of 1978. Over 80 percent continued to report paying higher prices.
District crops (concentrated in corn and soybeans) range from "good" to "excellent" following recent beneficial rains. Bumper harvests appear likely. Probable record grain and soybean shipments for the next several months imply that transportation and distribution facilities will be under stress. Grain shipments out of the Great Lakes region have been slowed in recent weeks by labor disputes at the ports of Chicago and Duluth/Superior.
District farmland values rose 3 percent in the second quarter and were 13 percent above year-ago levels. Prospects of high farm earnings this year help sustain the uptrend.