Beige Book Report: Chicago
May 14, 1980
The business decline that developed on a broad front in March, spread to additional sectors in April and May. Retail sales have slumped, especially for large items and luxury goods. Reports of layoffs and short weeks are frequent from manufacturers of a wide variety of consumer and producer goods. Residential construction activity already has dropped much more than in 1974-75, and nonresidential activity is expected to weaken in the second half as existing commitments are worked out. Easing credit conditions of the past several weeks will have a salutary effect on some of the businesses, consumers, and farmers who have been hardest pressed. While gloom prevails in agricultural areas because of poor income prospects, plantings are off to a fine start.
Economists have been revising economic forecasts downward. For example, one of Chicago' s best-known bank economists told reporters on Friday that conditions have deteriorated faster than expected, and that the recession may be the "longest and most severe since the 1930s." Among the industries that have made new cuts in sales estimates for 1980 are motor vehicles, steel, building materials, farm equipment, and construction equipment.
We have no evidence of an upswing in defense procurement in line with the Administration's statements. Defense contractors located in this district say that any acceleration has been in R&D contracts, mainly in New England.
Purchasing managers in Chicago and Milwaukee report that the March declines in output, employment, new orders, backlogs, and inventories accelerated in April. In Milwaukee, where capital goods predominate, April's drop was described as "precipitous," and reflected preparations dating back 12 months or more when recession fears were first expressed. For Milwaukee, 58 percent reported shorter lead times on purchased items in April, while only 2 percent reported longer lead times, an almost exact reversal of the report for April 1979. Price increases have moderated with bids reflecting more competitive markets.
National retailers report sales depressed everywhere, but with major areas of the Seventh District particularly bad. Consumers have been holding back on big-ticket items and have restricted credit use. One retailer expresses regret that it will not have to establish a special deposit under the credit restraint program. Before March, consumer credit was being restricted mainly by lenders. Now, restraint appears to be more from the demand side. Inventories that had appeared slim now seem excessive, and reduction programs are underway. Many retailers have been offering unusual price concessions, to stimulate sales, e.g., 10 percent store-wide discounts, substantial reductions on men's clothing, special cuts on multiple purchases, etc. Air travel has declined since February, and is now expected to be off 6 percent for the year. Consumers are said to be delaying payments on bills owed to professionals, and postponing new obligations, especially in the case of dentists.
Prospects for the motor vehicle industry continue to deteriorate. Further layoffs—temporary, indefinite, or permanent—are reported for parts and materials plants, as well as assembly plants. Deep cuts, probably permanent, are underway for salaried workers. Capital spending programs for subsequent years are being scaled down, mainly by reducing the number of new models requiring retooling. So far, regular jobless pay and SUB payments, increasingly supplemented by "trade adjustment assistance," are helping to maintain worker incomes. But the longer-term picture is grim for Michigan, which has almost 40 percent of vehicle employment. Michigan concentrates on the hard-hit big cars and trucks, it has most of the redundant overhead personnel, and it has most of the obsolescent plants to be closed.
Revival of the motor vehicle industry will be made more difficult because of the demise of numerous large dealers, some located in prosperous areas, who are essential for maximum sales. Auto companies also complain that dealers are not carrying adequate stocks to take advantage of sales opportunities.
Substantial layoffs have occurred, or are scheduled, in the farm and construction equipment industries. This is significant because the three largest companies had strikes in the current fiscal year that lasted 18, 79, and 172 days, respectively.
Orders for steel dropped abruptly in late March and have remained depressed. Cuts by motor vehicles producers continue, and new weakness has developed in farm and construction equipment, structural steel, and prefab buildings. A local steel company has reduced its estimate of second quarter shipments by 15 percent in recent weeks.
Paperboard orders in physical units, which had leveled off in the spring of 1979, were 6 percent below last year in March, and probably by a similar margin in April. Many customers have cut back on paperboard orders as they have reduced workweeks. Production of household appliances, lawn equipment, outboard motors, and other large consumer goods shipped in boxes is down more or less sharply.
Home mortgage rates have been dropping rapidly from the 16.5-17 percent peaks posted in mid-April. More important, some new loans are actually being negotiated again, in contrast to the virtual halt in the March-April period. The decline in new residential construction will not be reversed quickly. Too many builders have called off plans for 1980, and some buildup in finished properties has occurred. In the Chicago area, only 700 permits for single-family homes were issued in the first quarter. This is off 84 percent from 1978 and 61 percent below the depressed period of 1975. Apartment permits are down almost as much. Reports from other large district centers are similar. Estimates of the jobless rate for construction workers range from 20 to 40 percent—with many on short weeks. Demand for ready-mix concrete, gypsum board, hardboard, lumber, plumbing fixtures, built-in appliances, and carpeting is way off with accompanying layoffs in manufacturing, distribution, and installation. Layoffs by realtors and title companies are also significant.
Tight credit conditions and bleak farm income prospects continue to have an adverse impact on Seventh District agriculture. Our survey shows farmland values down in the first quarter. Since 1960 these values dropped in only one other quarter—in 1977. Average rates on farm loans at rural banks rose from 13.5 percent in January to 17 percent in April. While bankers have been rationing credit, they also report a steep decline in demand. Farmers are restricting purchases of all types, especially equipment. Recent evidence suggests that rural credit conditions may be easing as outflows of funds associated with high market rates slow down. Spring plantings have an excellent start, but scanty rainfall and low topsoil moisture raise concern about seed germination.