Beige Book Report: Chicago
July 1, 1980
Already weaker than the nation generally, economic conditions in the Seventh District deteriorated rapidly in late March, April, May, and June. Jobless claims have mounted rapidly. It now appears that the recession, in this region at least, will be much deeper, more pervasive, and longer than in 1974-75. Price increases have slowed and some discounting is noted in wholesale markets. But underlying inflationary pressures remain strong, pushed by rising labor costs. Virtually all consumer goods and services have been hard hit, and the downturn has spread increasingly to capital goods. The farm sector, which held up well in 1974-75, is badly depressed despite some recent rise in farm prices. Little or no improvement has occurred in housing, but nonresidential building remains strong. Credit is now generally available on more favorable terms, but borrowers are reluctant to incur debt. Delinquencies have increased. Although the picture is very gloomy, there are some signs that demand in various markets is leveling off at reduced levels, and there are scattered reports of modest improvement in the past 4-6 weeks.
Sectors reporting a leveling off of demand at reduced levels in June include paper, chemicals, RVs, mobile homes, and steel. In some cases a slight improvement is reported. A large national retailer sees some rise in sales in June, seasonally adjusted, although the picture is still very dark.
Our contacts in various industries operating in national and international markets tell us that the Midwest, defined broadly as the area north of the Ohio from the Appalachians to the Rockies, is much the weakest that they serve. Some have noticed no clear recession in the South, Southwest, or West Coast.
Major capital expenditure programs underway have not been halted, but some have been slowed to cut costs, and managements are using more exacting standards when considering new programs. On the optimistic side, a company that advises on new plant locations informs us that new proposals to be studied are still coming in at a fast pace. The nonresidential building picture remains strong. Contracts had dropped off sharply in the spring, but new office buildings and shopping centers again are being announced for near- term starts, mainly in the Chicago area. Many of these projects are financed in substantial part by European funds.
Manufacturing industries that have cut production very sharply now include autos, trucks, tires and other components, steel, farm equipment, construction equipment, RVs, outboard motors, appliances, building materials, oil refining, and petrochemicals. Inventories were generally viewed as lean early this year, but the rapid drop in sales required substantial adjustments in production schedules on short notice. In most cases output has been reduced faster than consumption, so a reversal may occur later this year. Many plants will be shut for several weeks this summer, confusing normal seasonal trends.
Electric, gas, and telephone utilities have experienced declines in demand to a degree unexpected earlier this year. Rail, truck, and airline traffic is down significantly. Layoffs have occurred, and equipment has been idled. The airlines will cut operations substantially after the peak summer season. Truck lines report tonnage down 20-40 percent. Truckers are very concerned about shifts in traffic patterns under deregulation.
Capital goods producers report increased order cancellations, but not to the extent of 1974-75 when backlogs contained much more water. Cancellations are most significant for heavy trucks and rail cars, but some machine tool orders are being canceled. Oil and gas well equipment is booming.
New jobless claims are running about 200 percent above last year in our states. In addition, many plants are on short weeks. White- collar workers have been affected much more than in earlier recessions. Many companies complain about the unwillingness of unions "to give an inch" in the face of high unemployment and company problems. Strikes have halted construction in Milwaukee.
Many lenders complain of a rapid rise in bankruptcies, especially personal bankruptcies, spurred by the recession, the new law, and lawyers anxious for business. Among business bankruptcies, vehicle dealers and home builders are most common.
Existing home sales have picked up slightly as mortgage rates have dropped to 12 percent. Rates on RRMs are still lower. Unsold backlogs of finished or semifinished homes and builder bankruptcies have kept new starts at the lowest levels since World War II.
Despite recent increases in livestock and crop prices, the farm picture in the district remains dismal. Adjusted for inflation, total net farm income for the year will be at one of the lowest levels since before World War II. This is reflected clearly in the severely depressed market for farm equipment. Because of higher prices, livestock farmers will do better in the second half of 1980 than in the first half when large losses were typical. Crop prices have edged up, but not nearly enough to offset higher production costs. Early prospects suggest excellent crops again this year, but probably not at record levels. Crops in parts of Iowa were destroyed by hailstorms in June. Most of this acreage was replanted, but yields will suffer. Federal programs will help cushion losses of farmers affected by hail.
Loans and deposits at district member agricultural banks have been very weak this year. Total loans at three banks were 2 percent lower in May than in December. No downturns in loans had occurred in this period in the 1970s. Total deposits rose slightly, but less than half as much as the average for the 1970s.