November 12, 1980
Summary
Activity in the Seventh District shows mixed trends, but
remains depressed overall, especially in contrast to the nation.
Reaction to the election was very favorable on the part of
management. But sharply higher interest rates are causing great
uneasiness. Price inflation has accelerated, partly because of
rising labor costs. Retail sales have improved somewhat, but sales
of autos and trucks have been disappointing. Airline traffic is
sharply lower. Producer equipment output is declining. Steel demand
has improved further. Housing remains bleak. The financial position
of farmers has improved, and farmland values are on the uptrend
again.
Reaction to election
Business and financial executives seem to be
almost unanimous in their enthusiasm over the extent of the
conservative shift registered in last week's election, unmatched
since 1952. They realize that any policy changes will take time to
implement, but anticipate less onerous administration by regulators
and less antagonism toward the profit system, which should encourage
risk taking.
Prices
Wholesale prices are rising at a faster pace again. Utility
rates are about 20 percent above last year, but are still deemed
inadequate. The CTA might raise transit fares in Chicago from 60 to
85 cents at year end, and to $1 next June. Airline fares are sharply
higher.
Labor costs
Labor organizations, which now include many municipal
workers, display an unswerving militancy in contract negotiations
despite widespread layoffs, especially toward attempts of management
to change work rules to improve productivity. The GM-UAW pact of
September 1979 was valued at 34 percent over three years, assuming
an 8 percent annual CPI rise, much less than has occurred. The GM
formula set the pattern for other major industries. In several
recent instances managements at various district plants have told
workers covered by national labor contracts that labor costs are
about 25 percent less at competing plants in the South. Some or all
of the jobs at these plants are in jeopardy. Higher energy costs in
the North are also an adverse factor.
Retail sales were somewhat improved in October, with seasonal merchandise aided by colder-than-normal weather. Retailers are said to have ordered cautiously for the Christmas season, which will not begin in earnest until the second half of November. Some retailers insist that last year's federal bankruptcy law must be revised because of growing abuse. "Slow pay" problems on professional bills have increased demands for cash payments and improved business for bill collectors. Many established fixed-price retailers are said to be ready to "deal" with customers to meet competition. Manufacturers of riding mowers, RVs, outboard motors, and other luxury goods are holding production at a very low level.
Autos and trucks
Sales of autos and trucks have been somewhat
disappointing thus far in the model year. Various assembly plants
are being closed periodically for a week or more, including the
plant where Chrysler assembles its smallest compacts, which were in
short supply in mid-1979. Heavy truck demand appears to have
stabilized and is expected to rebound in 1981. Indefinite layoffs in
the auto industry have dropped from over 250,000 to 191,000, but
little further improvement is expected.
Airline travel
Airline passenger miles in October were down about
11 percent from last year. Traffic was down 17 percent for the
largest airline, partly because of the stimulus of half-fare coupons
last year. With increases totaling 26 percent since June, standard
air fares are now 40 percent above last year, an unprecedented
development. Another 6 percent boost is set for later this month.
Higher fares are a major factor depressing both business and
pleasure travel.
Capital goods
Order backlogs for most producer equipment continue
to decline. New orders are weak. Some analysts expect the producer
goods downturn to persist past mid-1981. Some of the largest
construction equipment plants are shut down temporarily. A revival
in demand for construction equipment depends on housing. Orders
received by a producer of capital goods components have increased
for two months, reflecting needs for replacement and maintenance.
Steel
Bookings of a leading steel company are running at 80 percent
of capacity, with sheet products leading. Shipments will continue at
an improved level through year end, but will remain well below last
year's peak. Substantial price increases are being posted. A hot
strip mill, closed last May after demand suddenly dried up, has been
reopened. Steel companies producing oil country goods are planning
increases in capacity, because current facilities are running at
full capacity—a unique situation for the various product groupings.
Housing
Residential construction and transactions are very weak
throughout the district. In the first nine months single-family
permits in the Chicago area were 66 percent below last year and 84
percent below 1978. Multi-family permits were off somewhat less.
Sales of existing homes were down 33 percent from last year, and 41
percent from 1978. Mortgage rates have risen further to the 14-15
percent range, but few loans are being negotiated. (One large
Chicago S&L stopped making loans on November 5.) Some S&Ls are
offering only variable rate mortgages. Many home builders, and some
mortgage bankers, have ceased operations, at least temporarily. A
leading producer of building materials is raising its forecast of
housing starts in 1981 to 1.45 million. This is based on (1) growing
evidence that the housing stock is inadequate, and (2) an expected
decline in the basic mortgage rate to the 12-13 percent range.
Agriculture
Rebounds in commodity prices and farm income prospects
in recent months are credited with sparking a rise in farmland
values in the district, up 5 percent in the third quarter, and
enough to wipe out the decline of the first half. Farm loan demand
remains soft despite a marked improvement in availability of loans.
Deposits at rural banks have increased and loan repayments have
accelerated as farmers increased cash marketings. Transportation
problems are not nearly as significant as last year, because of
smaller crops and an increase in the number of hopper cars.
Purchases of farm implements have increased, but only moderately,
and not for all types.