May 13, 1981
Summary
Economic activity in the Seventh District remains depressed
relative to the nation. Nevertheless, year-to-year comparisons in
sales and orders for April and May will appear favorable because of
the sharp "free fall" declines that occurred last year. Employment
in all five district states is running below last year's level, with
no significant near-term improvement anticipated. The recent rise in
interest rates cut-off a very modest, incipient improvement in
housing. More businesses and state-local governments are
experiencing financial problems. Demand for capital goods is
generally weak. Steel orders continue to be strong. Although sales
of autos and trucks remain disappointing, general merchandise has
been surprisingly good. With improved moisture conditions crop
prospects are good, but farm income estimates for 1981 have been
reduced because of depressed prices.
Inflation
Price inflation has moderated in highly competitive
sectors. Retailers report a general slowing of the rise in prices.
Concrete and lumber are down. Over 70 percent of Chicago area firms
reported paying higher prices in April, compared to 90 percent a
year ago, but none paid lower prices. All transportation costs are
up sharply. Utilities insist that large boosts are needed to prevent
insolvency. Overall there has been no improvement in inflationary
psychology.
Employment
Demand for workers continues slow throughout the
district. Help-wanted ads in Chicago papers are about one-third
below last year. A number of permanent plant closings involving farm
and construction equipment, motor vehicles, oil refining, and meat
packing have been announced in the past two months. Hirings by state
and local governments are curtailed by budget constraints. Many
business firms are pushing wage cost reduction programs. These
efforts are complicated by pressure to meet EEO quotas. Attempts to
get unions to accept concessions are seldom successful.
Retail sales
Large national general merchandise retailers
headquartered in the district reported increases in sales averaging
20 percent over last year in April. This was the best showing in
years, and was surprising to merchants who had noted some
improvement in March. Part of the surge is attributed to depressed
sales of homes and motor vehicles, and to reduced vacation travel.
Capital spending
Demand for capital goods is generally
disappointing. Foreign orders are up, however. Machine tool orders
are off by one-third and cancellations are up sharply. Demand for
heavy trucks and trailers, freight cars, mining equipment, and
construction equipment is weak. Farm equipment is mixed. The oil and
gas development sector is very vigorous, but the district has only a
limited participation. Utilities are slowing capital expenditure
programs, partly because of financial problems, and partly because
of reduced estimates of demand. The auto industry is postponing
major projects because of inadequate sales and reduced cash flow.
State and local government
Financial stringencies on state and
local governments are worse than at any time since the 1930s.
Officials in all five states have commented that programs are being
constrained by shortages of funds caused by shortfalls in revenues
and reduced federal grants. Medical care costs are up. Wisconsin,
which had led other district states in economic performance, has
been hurt by layoffs in capital goods, motor vehicles and
recreational products. Its governor recently said the state was in a
"deepening depression." The Chicago area has been warned of a
possible shutdown of its vital rapid transit service.
Motor vehicles
Auto assemblies in the second quarter will be about
20 percent above last year, following a decline in the first
quarter. Long model change-over periods at some plants to convert to
Front Wheel Drive cars and will hold output at last year's level in
the third quarter. Sales dropped off sharply in late March and April
after the rebates were withdrawn. Sales of heavy trucks dropped back
in the first quarter instead of increasing as expected.
Steel
Demand for steel from Chicago area mills has been strong,
partly because of inventory building. A leading firm is operating at
effective capacity and expects this to continue into the third
quarter. Detroit mills, heavily dependent on autos, are operating at
lower rates.
Housing
Improvement in home sales noted in March was wiped out in
April and May as credit tightened. Some lenders are quoting mortgage
rates as high as 171/4 percent, but with few takers. Some S&Ls are
not making any new commitments, probably an unprecedented situation
at this time of year. Many sales involve loan assumptions or seller
subsidies. There is no evidence that recent easing of regulations in
VRMs is having a significant effect. There are reports of cuts in
asking prices for new and used homes, but there is no reliable
quantification.
Non-residential construction. Growing deficits have caused state and local bodies to cut back on bridge and highway work and other public facilities. A major boom in office buildings is in progress in Chicago's downtown area, but some analysts believe the wave is "over the top."
Agriculture
District farmland prices rose two percent in the first
quarter according to our survey, but only half as fast as in the
second half of 1980. Liquidity at district agricultural banks is
ample, but loan demand is held back by high interest rates, low farm
earnings, and by use of non-bank lenders. Recent rains have ended
drought fears, but have slowed field work which had been ahead of
schedule. The outlook for good crops is still favorable. Hope for
high grain prices have been dimmed by smaller than expected exports
and large harvests abroad. Both cattle and hog farmers report that
selling prices remain below costs of production. Overall, these
developments have caused analysts to reduce estimates of the extent
of the rebound in farm income this year.