Beige Book Report: Chicago
September 12, 1979
The view that the economy has entered a recession is widely held in the Seventh District, but many companies have not been affected directly and foresee no crisis. The dichotomy between weak consumer markets and relatively vigorous capital spending continues. However, orders for equipment are slowing and backlogs of some companies are declining. Labor markets have softened in most areas. Price inflation has not abated. The farm sector is generally prosperous.
Most executives in the district apparently accept the view that the economy is in a recession that will be "short and shallow." Frequently, they state that they have seen no sign of a decline themselves, but, nevertheless, they are taking the usual precautions of tightening up on new hiring, inventory investment, and, in some cases, capital appropriations. They insist that their operations are not as vulnerable as in late 1974, because of "lessons learned" in 1975.
Although employment has probably leveled off overall in the district, substantial layoffs have been confined to the motor vehicle and recreational vehicle industries. Even in the depressed residential sector, there are few signs of idle workers. But new hiring is down. Help-wanted ads in Chicago papers dropped sharply in August, after remaining at a high level through June.
Consumers continue to show caution on major purchases, but they appear to have ample funds for "back-to-school" items and everyday purchases. Lower-priced general merchandise chains appear to be benefiting at the expense of luxury-oriented stores.
Substantial price cuts on overstocked autos have stimulated sales in recent weeks. Nevertheless, 1980 model production schedules for larger cars are still being reduced with periodic shutdowns of assembly lines. Demand for light trucks and recreational vehicles continues very weak. Sales of heavy trucks are holding at record levels, but analysts are convinced that a, decline is inevitable with 1980 down 20 percent or more.
About one-third of Chrysler's hourly workforce is now on indefinite layoff. Chrysler's future is of particular concern to the City of Detroit where it is the largest employer. There are fears that at least one major obsolete plant will be closed permanently. With supplementary benefits, laid-off auto workers receive up to 95 percent of their normal take home pay. However, depletion of Chrysler's SUB fund threatens this portion of the benefits.
Orders for steel from the motor vehicle industry have been cut in line with production schedules. Shipments to most other industries remain well above last year. However, new orders, especially advanced bookings, are well below shipments and backlogs are declining.
While most capital goods producers continue to operate at high rates, the picture is increasingly spotty. Sales of farm equipment continue very strong, and above earlier estimates. Electrical components are still vigorous. Demand for construction equipment and materials handling equipment, however, has eased off. New orders for metal-cutting machine tools have leveled off, but backlogs are expected to keep most producers going full blast into next year. Orders for freight cars dropped suddenly in June. The freight car backlog is large, but cancellations are possible.
Gasoline supplies appear adequate if not ample. Many gas stations have extended operating hours, but not to normal standards. Much of the improvement reflects reduced driving. Summer traffic on Interstates in Illinois was l4 percent below last year, compared to a 22 percent shortfall in early June. The month of May had been even with a year ago.
Heating oil supplies are further below desired levels in the Midwest than elsewhere. However, experts believe that no serious shortages will occur this winter, unless some new supply problem develops.
Nonresidential construction is still vigorous, especially for office buildings and hotels. Builders are rushing construction of at least 10 large office buildings and hotels in downtown Chicago. Recently another large office building of 1.1 million square feet was announced. Some of the first buildings started in the current wave will be occupied soon. Leasing is said to be proceeding at a rapid pace. Existing high quality space is in tight supply. Rents are reported to be up 25 percent from last year and 60 percent from 1977, partly because of escalation contracts. Hotel occupancy is also strong and room rates are up 20 percent in about 18 months.
The market for single-family homes in the Chicago area is probably the weakest of any large metropolitan area. This situation does not reflect a depressed local economy because employment and unemployment data compare fairly well with national trends. Moreover, mortgage money has been available, at about 10.5 percent on 20 percent loans. The weak home market is blamed partly on three successive severe winters, which may have encouraged net out- migration and a rapid expansion of the condominium market.
Chicago area residential permits were 42 percent below year ago in July, and off 40 percent for seven months. Single-family permits were off 45 percent for July, and off 49 percent for seven months. An unusually large number of existing homes are listed for sale, and houses remain unsold for unusually long periods. Meanwhile, the inventory of finished new homes is slim as few starts have been made without firm orders. Prices of existing homes have declined in many areas, especially on higher-priced units and units located away from built up areas. Prices of new homes have continued to rise with costs of labor and materials. Similar reports are heard from other large urban areas in the district.
A growing number of contractual payments, not only wages, but rents and other outlays are automatically escalated. Many contracts cite the local index. In July, when the all-city CPI was 11.3 percent above last year, the indexes for Chicago, Detroit, and Milwaukee were up 13.5, 12.8, and 14.9 percent, respectively.
At this point, corn and soybean crops in the Midwest appear to be heading for records or near-records. However, a severe early frost could cause losses because of late plantings. Transportation tie-ups in moving grain have been worsened by the Rock Island strike.