Beige Book Report: Chicago
December 10, 1980
Summary
Fears are growing that the economy is slipping back into a
recession. Christmas traffic is heavy at outlying shopping malls,
but actual buying is said to be restrained, especially for Big
Ticket items. Forecasts for autos and trucks are being scaled down.
Sharply higher interest rates are putting a damper on many
activities, but there is no sudden, drastic impact such as occurred
last March and April. The strongest sectors are electronics,
computers, telecommunications, oil and gas development, and defense.
Steel operations are holding at an improved rate. Most other sectors
are weak, both for consumer and business products. Housing activity
has practically come to a halt except for site preparations.
Inflation is accelerating. Fuel supplies appear adequate for the
winter, but problems may begin to appear next spring.
Output and employment
Purchasing managers in Chicago and Milwaukee
reported higher output in November, but employment was stable or
lower. New orders rose in November, but backlogs continued to
decline.
Prices and wages
Last August only about one-third of the purchasing
managers in Chicago and Milwaukee reported paying higher prices,
while about 10 percent reported lower prices. In November, over 60
percent reported higher prices, while less than 4 percent reported
lower prices. Steel, aluminum, and gas and oil were up most. Chicago
area employers boosted white-collar salaries and wages about 9.5
percent in 1980, up from 8 percent in 1979. Another rise of 9.5
percent is seen for 1981.
Retail sales
Customer traffic at big retailers has been heavy on
weekends. Nevertheless, most customers are buying very cautiously,
especially when installment credit is required. Worried retailers
are promoting specially-priced merchandise heavily, a practice
reminiscent of the 1974. Christmas season. Stocks had been held down
intentionally, but there may be need for liquidation sales in
January.
Motor vehicles
Sales of cars and trucks remain below expected
levels, especially for Chrysler. Dealers are in jeopardy again,
partly because of the rapidly rising cost of floor planning. A major
Milwaukee bank has withdrawn from floor planning entirely. Most
banks have raised rates on consumer vehicle loans, and more are
restricting loans to customers or are taking other restrictive
measures. Observers believe that first quarter output schedules will
be reduced. Purchases of vehicles by business are fairly strong.
Capital goods. No revival is yet apparent in producer equipment. Backlogs have leveled off in some cases, but continue to decline overall. Demand for components needed for maintenance has increased moderately. Hopes are growing for an improvement in farm equipment sales in the spring. Construction equipment remains at a very low ebb. Several plants have been closed temporarily and some permanently.
Steel
Deliveries of steel are up significantly and will continue at
an unproved level into the new year. Demand for oil and gas country
items is well in excess of capacity. Sheet orders are on extended
lead times, while other lead times are normal. More bidding is being
done on structural steel. Some of the improvement in steel demand
represents a desire of companies to rebuild depleted inventories to
protect their LIFO base.
Housing
Mortgage rates have moved into the 15.5 to 16 percent range
with very few transactions taking place. The inventory of finished
and semifinished houses is low, but builders have been preparing
tracts of land.
Nonresidential
Contracts for caissons and bidding on structural
steel suggest a continued high level of construction for office
buildings, hotels, and luxury apartments in Chicago's downtown area.
Other major cities report similar trends on a smaller scale. An
overhang of unrented space is reported for the suburbs, however.
Substantial contracts are also being let for renovations of existing
office buildings and hotels.
Fuel
Fuel supplies appear adequate for the winter, but analysts
expect severe trouble next year if the Iraq-Iran war is not settled
by April 1. A crisis is certain if the war spreads. Estimates of the
rise in oil prices next year have been raised. Natural gas is
increasingly looked to as the nation's best energy hope for the
years ahead. Canada and Mexico have surpluses, and domestic supplies
are being augmented by findings of huge quantities of gas below the
15,000 foot level.
Municipal finance
State and local governments are under pressure to
cut outlays to reduce budget deficits. At least one governor has
frozen hirings. Tax receipts, especially gasoline taxes, have been
running below projections, and tax increases may be needed. In
Chicago, newly organized militant fire and police unions, already
among the highest paid anywhere, are threatening to strike to get
increases equal to the rise in the CPI.