Beige Book Report: Chicago
August 5, 1980
Evidence is increasing that some of worst hit consumer sectors will level off or improve moderately in the third quarter. Capital goods, however, are weakening on a broad front. Consumer and bus mess borrowing activities are assuming more normal patterns. Price cutting is common in wholesale markets. Housing transactions are picking up. Farm income prospects have improved with higher prices.
Sectors that appear to have touched bottom in May, June, or July include retail sales of general merchandise, passenger cars and light trucks, RVs, manufactured housing, gypsum board, cement, and steel. In no case, however, has a dramatic reversal occurred. Also, the improvements are largely associated with the consumer sector.
Most business managements are pushing stringent programs to cut costs to a point that may impair their ability to respond to increases in final demand later in the year. Cost-cutting measures include layoffs (even of valued, experienced people), hiring freezes, short weeks, suspension of COLAs and various nonwage benefits, halting contributions to pension funds, paring of inventories (even to the point that standard items are not stocked), using only the most efficient equipment, deferral of all but the most essential maintenance and repair, and delaying payments of bills. Clearly, these measures will adversely affect long-term competitive strength, but they are undertaken in a spirit of quiet desperation.
Complaints of slow pay on outstanding debts by both businesses and consumers are widespread. Actual inability to pay on time is responsible in some cases, but more commonly debtors are attempting to avoid interest costs by shifting the burden to their suppliers. Delinquencies on consumer credits have increased significantly, but are still not at the high level of 1975. Personal bankruptcies are becoming a much more serious problem, partly because of the new law. Businesses complain of a surge in bad checks, and a rise in shoplifting (already historically high). Bank robberies in the Chicago area have tripled from last year's rate.
Retail sales appear to have improved moderately since the May low. Consumers continue to buy cautiously and tend to patronize discount stores. (If K-Mart sales increase relative to Sears at the rate of the past 12 months, K-Mart will be the nation's top retailer a year hence.) Some old-line chains are expanding their discount type operations to meet competition.
Vehicle dealerships, small builders, and trucking companies continue to close their operations, some filing for bankruptcy, in numbers unknown since the early 1930s. Dealership closings, many large and long-established, will have far-reaching consequences. Not only are numerous employees involved, but a healthy dealer organization is essential for mass marketing of new and used vehicles and for servicing new cars under warranty. High interest costs for carrying inventories of slow-selling models have been a large factor in the dealer crisis. Captive finance companies have stretched their resources to help stronger dealers to survive. Dealer mergers have been tolerated and even encouraged by manufacturers.
With short lead times and unused capacity in virtually all lines, price-cutting is common in wholesale markets, including steel, nonferrous metals, and cement. Vendors are ready to negotiate prices on such items as office equipment and heavy trucks. Such concessions are thought to be a temporary reaction to weak markets.
Steel shipments are believed to have reached a low point at about 50 percent of capacity around midyear, down from 83 percent in April. Since then, there has been a slight uptrend. A smaller Chicago steel company has closed permanently. One of the largest Chicago-area mills is operating only one of six blast furnaces. Customer inventories of steel are said to be "extremely low," and any strengthening of final demand must quickly be reflected in orders for steel.
The farm and construction equipment industries continue in a slump, but there are hopes that demand will revive with the prospective improvements in farm income and residential construction. Demand for heavy trucks remains very weak. Order backlogs for rail cars are eroding. Since March, demand for capital goods has been slipping on a broad front. Notable exceptions are metal-cutting machine tools, and items related to oil and gas well drilling. A producer of large castings is operating at only 50 percent of capacity and demand for forgings, in tight supply a few months ago, has dropped sharply.
Home mortgage lending has picked up with rates in the 11-12 percent range plus 2-3 points. Housing starts remain at a postwar low for the summer months, but the unsold inventory is small and some rise in starts is seen before year end. Several large commercial buildings nearing completion in Chicago's Loop area are virtually 100 percent leased. Starts on several additional large commercial buildings will occur in the fall.
Farm income prospects improve as crop prices rise substantially in response to growing evidence that harvests will be affected adversely by weather-related damage. Crops look good in most of the Cornbelt, but pollination problems apparently will reduce yields. Hot weather also has adversely affected prospective meat supplies because of increased mortality, mainly of chickens, and poor weight gains for hogs and cattle.
Loan demand at rural banks in the district continues soft. Partly, this reflects lagging declines in the interest rates they charge. At midyear rates on farm loans averaged about 14 percent, down only 3 points from the end of the first quarter.
Our survey of farmland values shows an average decline of 2 percent in the second quarter which followed a similar decline in the first quarter. Values still averaged about 3 percent over the year-ago level.