Beige Book Report: Chicago
October 10, 1979
Except for housing, motor vehicles, and other sectors directly affected by rising fuel costs, the impact of the economic slowdown has been moderate in the Seventh District. Nevertheless, job markets have eased, and retail sales are sluggish. Some capital goods producers still report rising backlogs, but others note a distinct slackening in demand. Inventories are generally quite adequate, but not burdensome. No significant shortages of materials, components, or services are evident. Availability of skilled workers has improved. Nevertheless, the rate of increase in prices and worker compensation remains about as rapid as earlier this year. The dichotomy between strength in nonresidential construction and weakness in housing is increasingly evident. Bumper corn and soybean crops seem assured, but storage and transportation facilities are serious bottlenecks.
Most informed observers in the district believe that real GNP will decline moderately into the spring of 1980. Business managements have been warned about the impending recession for a year or more, and most have conducted their operations in such a way as to avoid becoming overextended. Double-ordering, rampant in l973-74, has been avoided, and manufacturers have allowed backlogs to build up, rather than schedule additional overtime and use other high-cost expedients.
Settlement of the GM-UAW confrontation without a strike was greeted with mixed feelings. Disruptions associated with a major auto industry strike were avoided, but employers were locked into a very expensive three-year contract. Information on the details of the auto pact is still somewhat vague, but it appears that the three- year boost in worker compensation will be about 35 percent, assuming an 8 percent rise in the CPI, and more if prices rise even more rapidly. This would raise average total labor cost per production worker from $30,000, currently, to $40,000. Compensation of nonunion employees will rise about in step. This comes at a time of poor sales and heavy layoffs which might have stiffened company bargaining in the pact.
The auto pact will set the basic pattern for the farm and construction equipment workers this year, and steel next year. Since October 1, about 55,000 workers have been on strike at Deere and Caterpillar. International Harvester workers have agreed to extend their contract awaiting developments. Layoffs have occurred at plants not on strike because of parts shortages. The issue in the strikes is said to be additional time off and other technicalities, rather than the basic package. In these industries, as in the case of autos and steel, the strongest firms can pay higher compensation at levels that might threaten the viability of weaker competitors. For some months prior to the strike deadline, production of farm and construction equipment had been maintained at higher rates than were justified by current sales so that inventories of finished goods could be increased as a strike hedge.
The market for larger cars and light trucks continues very weak with some new models selling so poorly as to require temporary plant closings. The industry's ability to produce more small cars will be quite limited for at least six months. Total auto assemblies are scheduled at 12 percent below last year in October, while truck assemblies will be off 33 percent. Similar year-to-year declines had been reported for the third quarter.
Heavy truck sales will set a record for 1979 as a whole. However, new orders have dropped sharply in recent months, and inventories have increased. Production schedules have been reduced accordingly. The downward phase of the heavy truck "cycle" is expected to continue to mid-1980 with reductions in sales and output of about 30 percent.
Steel orders have leveled off at a lower rate with virtually all of the decline traceable to motor vehicles and oil country goods. Steel orders for capital goods remain vigorous. Lead times are now "normal" compared to abnormally long periods last spring. An industry analyst expects mill shipments of 23 million tons in the fourth quarter, down from 24.5 in the third quarter and 26.6 in each of the first two quarters. Users are trying to reduce inventories which are not generally excessive.
Orders for machine tools and freight cars have slowed substantially, but order backlogs remain very large. Some machine tool producers expect orders from the auto industry to keep their operations at full capacity into the 1980s. Demand for construction equipment, especially types associated with home building and site development, have declined significantly. However, orders for some types of mining equipment, mechanical power transmission units, and industrial cranes have continued to exceed shipments, somewhat to the surprise of the producers.
Dry weather during September hastened the maturity of district corn and soybean crops which are now safe from frost except for the northern fringe. Harvesting is only slightly behind normal progress, despite late plantings. Apparent settlement of the Rock Island Railroad strike will help move grain which has been piling up. Liquidity pressures are still widespread at rural banks.
Home construction and sales are off much more sharply in the district than in the nation. Single-family permits in the Chicago area are running 50 percent below last year. Some builders have halted all speculative starts.