Beige Book Report: Chicago
January 28, 1981
Summary
The economy of the Seventh District is probably the weakest
in the nation, with no improvement in sight. Its dominant durable
goods industries, both consumer and capital goods, are operating
well below capacity. Some companies, however, report a recent
uptrend in orders. While credit is available, high interest rates
are severely restricting activity, especially housing and vehicles,
but also inventory and capital spending policies generally. Some
S&Ls face possible financial crises. Unemployment is high and jobs
are hard to find. Retail sales were strong just before and after
Christmas, but may have slowed recently. Farmland values rose again
in the fourth quarter.
Seventh District problems
The Seventh District has probably been
impacted more severely than any other by the economic problems of
the past two years. Industries concentrated here—especially motor
vehicles and components, farm equipment, and construction equipment—are in deep trouble with no improvement seen in the months ahead.
Instead of counterbalancing a slump in industry, as has happened in
the past, the district's farm sector also has been depressed.
Economic stringencies, strongly reinforced by outward migration of
people and industry, have made the housing situation much worse here
than nationally. High and rising energy prices have had a relatively
more harmful effect here, mainly because of heating costs. The
district has received little benefit from the energy boom or the
defense buildup.
Labor markets. New unemployment insurance claims remain at high levels throughout the district. Help-wanted lineage in Chicago papers was 40 percent below a year ago in the fourth quarter, and January has been about as bad. Although computer programmers, nurses, and certain other specialties are in short supply, demand for workers, generally, is very weak. Some examples: (1) an erroneous report that a Chicago-area major steel company was hiring attracted several thousand people, who created a dangerous mob scene; (2) an ad for bus drivers in Milwaukee brought a deluge of applicants that overwhelmed interviewers; (3) a trucking company reported a much improved supply of qualified drivers; (4) a bank in a smaller Indiana city reported 60 applicants, two-thirds qualified, for one clerical position paying $7,500. Companies interview many people "overqualified" for available jobs. Quality of entry-level job applicants in the larger cities, however, is deplorable.
High interest rates. Record high interest rates clearly are holding back many types of activity. Loans of all types continue to be available to creditworthy borrowers, in contrast to the situation last spring. However, tighter lending criteria turn away increasing numbers of marginal borrowers. More important, interest as a cost has become an overriding consideration for many businesses, and institutions. Car dealers are being forced out by "killing" floor plan rates-22 1/2 percent, recently. High rates have kept inventories abnormally low for many manufacturers, distributors, and retailers. Some smaller manufacturers who had been expanding steadily are deliberately shrinking their operations in order to hold down interest costs. More larger firms are restricting outlays to internally-generated funds. High rates paid for CDs are seriously undermining many S&Ls, some of large size.
Credit problems
Firms with a "receivables problem" are increasingly
widespread. A dramatic stretchout in payments on receivables
occurred for some firms in the past year. Partly, this is because of
weakened financial positions of customers, but it also reflects a
desire to reduce borrowing costs, and, in the case of cash-rich
firms, to increase earnings on liquid assets.
Capital goods
Backlogs for most types of capital equipment and
components appear to be declining, but there are notable exceptions.
Farm and construction equipment are especially weak with some plants
closed. Railroad equipment is in a steep decline and heavy trucks
have softened. In contrast, the oil and gas field is swamped with
orders. Heavy castings picked up in December, but output is only
about 50 percent of capacity. One diversified capital goods producer
reported an uptrend in orders in December, followed by a surprising
surge in early January, but the reasons are not clear, and this
improvement is not reported by companies.
Motor vehicles
Output schedules for cars and trucks are being
reduced, and sales estimates for the year have been scaled down. The
new slump has affected even the most popular small U.S. and imported
cars. The auto industry blames the Federal Reserve for its plight,
playing down higher prices. Since consumer loan rates are widely
subsidized, the "perception" of high rates is blamed. Dealerships
continue to close, and many of the strongest are said to be losing
money.
Steel
Steel orders have slowed somewhat, with lead times
shortening. Some companies say shipments will be relatively good in
January and. February, but March is doubtful. However, a leading
company is shipping at capacity and expects to continue to do so
through March.
Retail sales
General merchandise and specialty store sales surged
just before Christmas, helped by price cuts, and remained at a good
level into early January. In recent weeks, however, sales slipped
back. Several long-established chains are closing marginal stores.
Transportation. Railroad traffic, except for coal and grain, is depressed. Newly-purchased freight cars are standing idle. Trucking companies are experiencing intense competition under deregulation. Rates are being discounted, and fluctuate daily. Many companies are expected to fold up or merge with stronger firms. Operators facing nonunion competition are expecting aggressive bargaining with the Teamsters in 1982.
Construction
Home mortgage rates are quoted in the 14 1/2 to l6
1/2-percent range, but few customers apply. "Creative financing" takes many forms, for example, one-year rollover mortgages. Housing
starts in large district centers were off 70 to 90 percent in 1980
from the 1977-78 level, and virtually zero in some smaller towns.
The current picture suggests an even bleaker 1981 if rates do not
decline soon. Office building construction continues strong in
downtown Chicago with important new projects being started.
Agriculture
Our farmland survey shows a 4 percent rise in values in
the fourth quarter, following a 5 percent rise in the third quarter.
Liquidity of rural banks continues to improve. A high proportion of
these banks are net sellers of federal funds, in part because of
soft demand for loans at current rates.