Beige Book Report: Chicago
September 9, 1980
Despite conflicting trends among industries, the tone of business activity has improved somewhat in the Seventh District during the summer months. In general, the consumer sectors have shown modest improvement, while most capital goods have weakened further. Recent increases in interest rates have dampened the incipient improvement in housing, and have reduced the availability of large commercial mortgages. C and I loan demand picked up at large commercial banks in August, but this is believed to reflect largely commercial paper facility credits. Prices have been soft in some wholesale markets, but this is believed to be temporary with the underlying inflation rate remaining at 10 percent or more. Layoffs have slowed down markedly, and workers have been called back in autos and steel. Most workers returned early in August from plant-wide vacations, which started earlier and lasted longer than usual. Farm income prospects have firmed up as farm prices rose, but there is substantial variability among individual farmers.
Psychology of consumers, business executives, and lenders, which had fallen to a very low ebb during the credit squeeze of the second quarter, has improved noticeably. Fears of a very long and deep recession have been replaced by feelings that the downturn in general activity may be near its bottom. However, almost no one expects a return to full prosperity for at least a year and perhaps longer.
Consumer spending has revived somewhat for both hard and soft goods, but real volume remains below last year. Among the items that are selling better are cars, small trucks, recreational vehicles, and a variety of household goods. Most people are after bargains, and discounters, big and small, seem to be gaining at the expense of old-line general merchandise retailers.
Consumer credit is being used more freely again. Most installment lenders have dropped "customers only" policies. Interest rates have come down from their peaks, but remain well above last year's levels. Delinquencies have increased, but not to the worst levels of 1974-75, except in certain hard-hit localities.
Order backlogs of most capital goods producers have eroded rapidly. Producers of oil and gas exploration equipment, however, report insatiable demand. Producers of machine tools required by the vehicle and aircraft industries see high demand well into 1981. Farm equipment prospects have improved with farm income. Construction equipment remains very weak. The dominant construction equipment producer, which sailed through previous recessions without layoffs, has announced a second sizable furlough of indefinite length. Sales of heavy trucks and trailers are still declining with good buys available on the second-hand market. Railroad car deliveries remain at a high rate, but order trends point to a long, slow period ahead. Mining equipment and materials handling equipment also are slow. A producer of heavy castings for a variety of customers reports "no backlog," operations below 50 percent of capacity, one shift operation rather than two and a half, and no improvement in sight for any customer group except farm equipment. Foreign demand for U.S. equipment, which had been stronger than domestic demand, began to weaken in the summer.
Orders for steel picked up in August (especially for cars and light trucks and appliances which had dropped most), but remain far below capacity. Steel buying is hand-to-mouth, and a significant pickup in demand could mean a stretchout in delivery times. Inventories are very lean at the mill, warehouse, and customer levels. Steel mills have been able to boost some prices recently.
Except for petroleum products, petrochemicals, and such items as heavy trucks and trailers, the view that inventories are low seems to be well substantiated. Deep-seated caution, high carrying costs, and weaker financial positions that inhibit borrowing help explain this phenomenon. Prices of residential building materials softened in recent months, but analysts are concerned that the failure of builders to order ahead for 1981 will limit residential activity.
The worst of the car and truck dealer crisis appears to be over. Weaker dealers have gone out of business. Manufacturers have relaxed rules to allow their dealers to offer other lines, including foreign cars and trucks, and even the lines of domestic competitors- previously an unheard of practice. Inventories of 1980 model large cars and trucks have been largely depleted with prices strengthening. The 1981 model line-up, featuring greater fuel economies, is expected to keep car sales moving up from depressed levels.
Home mortgage rates in the Chicago area jumped to 13 percent on conventionals, and to 12.5 percent on RRMs in the past two or three weeks. As rates moved past 12 percent, builders reported a sharp drop-off in customer traffic. Plans of tract builders, which were starting to come to life, have been shelved again. The Chicago area, despite an apparent 4 percent loss of population 1970-80, is on the verge of a serious housing shortage. Despite the recession, sales prices of existing homes have continued to rise. New home prices have been even stronger. The situation is reflected in the conversion of better grade rental units to condos, against the desires of tenants who find alternatives scarce. New unsubsidized apartments are almost all condos with many units purchased by investors. A strong push is expected for expanded subsidy programs for both rental and owner-occupied dwelling units.
About 8 million square feet of office space nearing completion in downtown Chicago is almost all leased. A new wave of large office buildings, hotels, and luxury condos will get underway soon. Since mid-August, however, new commercial mortgage commitments "have dried up."
Labor unions have not moderated demands because of the recession. Offers of 10 percent first-year wage increases have been rejected, with demands for 12 percent or more, plus other "improvements." In addition, demands for "inflation protection," both for workers and retirees, are often dominant issues.
Because of increased competition from nonunion truck operators under deregulation, unionized truck operators have invoked the renegotiation clause in the 1979 Teamsters contract. With COLA, straight-time drivers' pay now exceeds $11 per hour. The main effort of the operators will be modification of work rules that impede efficiency.