Beige Book Report: Chicago
November 14, 1979
The recession in the motor vehicle and residential sectors appears to have deepened in the Seventh District with no early reversal in sight. Some major unions have gone on strike over disputes involving work scheduling and other problems not related to compensation offers, which are substantial. Consumer purchases of durables, other than vehicles, and luxury goods and services also have slowed. Sales of some capital goods, including farm and construction equipment, have turned down. Backlogs of many companies are said to be eroding, while shipments remain strong. Most companies are attempting to reduce inventories, but there is little evidence of serious gluts. Price inflation continues with undiminished virulence. Record corn and soybean crops have been harvested, but storage and transportation facilities are seriously inadequate. All classes of lenders are tightening standards because of reduced inflows of deposits and the high cost of purchased funds.
The overwhelming majority of consumers, business executives, and lenders believe the nation is in a recession which will run well into 1980. Many observers are puzzled by the strong performance of government data on employment, retail sales, new orders, and "leading indicators." Nevertheless, there is virtually no evidence of panic, such as occurred in late 1974.
A surprising number of executives, even in S&Ls, have publicly supported the Fed's tougher policy stance even though they believe painful adjustments lie ahead. However, builders, realtors, labor leaders, and certain politicians are openly hostile.
The deep and involved problems of Chrysler are unique among well- known companies headquartered in this District, insofar as we can determine. Chrysler's difficulties are of concern to its suppliers and dealers who employ more people than Chrysler itself.
The slump that hit the auto and light truck industries early this year shows no sign of abating. Sales of big cars were helped by heavy rebates on 1979 models in August and September, probably at the expense of 1980 models. Inventories of large cars and light trucks remain excessive and new production cutbacks are announced periodically. Deliveries of heavy trucks have begun to slide, and new orders are far below factory shipments. Huge order backlogs are reported for popular small cars, but many people are believed to have placed multiple orders, and some have placed orders with a view to immediate resale at a profit upon delivery. Under these conditions some dealers refuse to quote expected delivery dates.
Despite periodic scares, supplies of gasoline and diesel fuel appear adequate currently. Demand for motor fuel continues well below year ago. Reduced use of vehicles is associated with lower recreational expenditures, and reduced demand for tires, parts, and maintenance.
The Deere labor pact covering 30,000, concluded after a three-week strike, parallels the auto industry agreement. Wages will rise 36 percent in three years, assuming 8 percent additional per year for COLA--more if the CPI increases at a faster pace. Workers also will get 12 additional days off for a total of 46 paid days off annually. Since late October, strikes have been in progress at Caterpillar (40,000) and International Harvester (35,000). The main issues are said to be grievance procedures at "Cat," and mandatory overtime at I-H.
Analysts believe these strikes, which affect suppliers of steel and other items, will last for some time. Demand for the farm and construction machinery, and heavy trucks made by these companies had begun to decline in late summer. Production continued at a high level in order to build inventories of finished goods as a bargaining lever. A decline in output would have occurred whether or not labor negotiations were concluded without a strike.
Most capital goods producers continue to operate at high rates. The Milwaukee area, which concentrates on capital goods, appears to be the most prosperous of all large District centers. However, most companies report order backlogs declining, particularly if allowance is made for 10 percent inflation in the past 12 months. (We do not hear reports of cancellations, such as occurred in late 1974.) Slackening in the equipment sector is also suggested by a slump in orders for heavy castings.
Record crops of corn and soybeans are assured. Transportation and storage facilities are stressed taut. Fitful service on the bankrupt Rock Island and Milwaukee Road railroads, both vitally important to Iowa, is being maintained with federal guarantees and court-ordered expedient s. Motor transport is also strained. The bottleneck dam and locks on the Mississippi near Alton impose a 4-day wait on barge traffic moving South. Storage capacity for grain is full. Transport and storage problems have resulted in a substantial adverse price spread for grain held in the western portion of the District.
Liquidity pressures on rural banks, apparent all year, intensified in October. Interest rates are pressing against usury ceilings in some states, especially in Iowa.
According to our survey, District farmland values rose almost 6 percent in the third quarter, double the pace of the second quarter. On October 1, prices averaged 17 percent above last year.
Mortgage money has "dried up" throughout the District in the past 6 weeks, even in Indiana and Michigan where usury ceilings have not been a problem. Because of outflows of funds, high borrowing costs, and the temptation to keep funds in high-yield money market instruments, lenders have cut new commitments to a trickle. But past commitments are being honored. Some S&Ls have stopped taking loan applications entirely, while others have reduced activity by restricting loans to customers, raising down payments, and lowering loan maximums. Mortgage rates are at 13.5-14 percent in Michigan where they are free to move. On November 8 Illinois suspended its mortgage usury rate which had restricted loans to 11.5 percent for November. The largest S&L immediately announced rates of 13.5 to 13.75 percent, plus 2.5 to 3 points, with down payments of 25 to 35 percent.
Housing has been hit harder in the District than elsewhere. Permits for single-family homes in the Chicago area were 59 percent below last year in September, and down 51 percent for 9 months. The situation is similar in other areas in the District. Transactions in existing homes are very slow. People desperate to sell houses are being counseled to use land contracts, a generally unfamiliar and unpopular device. Housing in the District probably has been affected more than in the nation because of the relative unimportance of speculative building, lack of growth in many areas, and some exodus of weaklings oppressed by three successive severe winters.