Beige Book Report: Chicago
June 30, 1981
Summary
Seventh District business activity, overall, is unlikely to
show significant improvement in the second and third quarters,
although many firms will report good gains from the depressed
periods of 1980. This prospect suggests continued adverse
comparisons with the national economy. Most business firms now
anticipate lower sales in the near-term than they had expected a few
months ago. Moreover, a smaller rise in farm income is projected.
Construction plans, both residential and nonresidential, have been
scaled down. Loans are available in virtually all credit markets,
but high interest rates deter borrowing. With rising personal
income, retail sales have held up well. There is a widespread view
that an acceleration in general activity will begin late in 1981,
and continue into 1982. Such forecasts assume lower interest rates,
tax rate reductions, a boost from defense spending, and further
easing of inflationary pressures.
Employment
Demand for workers is weak. New layoffs or extended
vacations have been announced recently for farm equipment, meat
packing, and electrical products. However, claims for unemployment
compensation are running well below last year's level. Indefinite
layoffs reported by auto producers are down to 160,000 from 240,000
last year. Summer jobs for youth are hard to find, partly because of
cutbacks in CETA programs. Various state and local governments have
frozen hirings. Many help-wanted ads in district newspapers attempt
to lure skilled workers to the South and West.
Personal income and labor negotiations
Worker compensation
continues to rise at a rate of about 9 percent in the district,
despite a surplus of workers. Efforts of employers to get organized
labor to moderate new demands, or to renegotiate existing contracts,
have been successful only under a threat to shut down the operation.
Mass transit workers of the financially-strapped Chicago-area RTA
system threaten walkouts over any move to adjust their liberal
compensation and work rules. Building trades have negotiated 8.5 to
11 percent increases this year.
Retail sales
Some very large retail chains have been pleased by
double-digit increases in sales in recent weeks. They are using
heavy promotions and aggressive pricing. Consumer credit
delinquencies remain high. Most big ticket items often bought on
credit are not selling well. Most general merchandise chains are
losing money. An old chain has filed for bankruptcy under Chapter
11. Vacation travel and sales of recreational vehicles are being
aided by ready availability of gasoline.
Inventories
Most firms are holding inventories at low levels to
reduce heavy finance charges. Expected price increases no longer
spur anticipatory advance buying. In some cases product lines have
been narrowed and delivery times have been allowed to stretch out in
order to economize on working capital. Low inventories act as a
buffer against any possible recession, but they also provide a
springboard for faster inflation if final demand accelerates.
Steel
Orders for steel slowed somewhat in the past month, partly
for seasonal reasons. Steel demand is very strong for "oil country
goods", and is above last year for vehicles and appliances. Orders
for structural steel have softened. More steel users are buying from
service centers in order to keep their own inventories low. Total
steel shipments from U.S. mills are now projected at 93 million tons
for 1981, up from 84 million in 1980, but well below 100 million in
1979.
Capital goods
Most district producers of capital goods report new
orders well below their capacity and below expectations expressed
earlier. The weakest sectors are equipment for construction, mining,
and railroads. Demand for farm equipment and heavy trucks has been
disappointing. Equipment for oil and gas exploration is booked to
capacity, but this sector is relatively unimportant here.
Autos and trucks
Sales of autos and trucks have remained at low
levels. Output of cars and trucks in the second and third quarters
will substantially exceed last year s reduced levels, but will
remain far below the prosperous levels of 1978. Inventories may rise
in the months ahead partly to encourage concessions by the UAW.
Residential construction
Housing starts are running somewhat above
last year's very depressed level in district centers. Home mortgages
are offered at 16.5 to 17.5 percent or more, but with few takers.
"Creative financing" is not helping much. Many S&Ls and banks are
not making any mortgage loans. It is already too late in the season
for lower interest rates to help housing construction in the
district this year.
Nonresidential construction
A large number of smaller shopping
centers, office buildings, warehouses, and other nonresidential
construction projects were postponed in May and June. Interest rates
of 14 percent or more, often with equity participations, are too
high to attract developers. Most life insurance companies and
pension funds have halted all commitments on commercial mortgages.
Public construction is very weak, especially road work.
Agriculture
Recent rains eased remaining drought concerns in parts
of Iowa. However, plantings, already unusually late in the Eastern
cornbelt, were further delayed. These developments are dampening
hopes for good crop yields in the Midwest. Farm income in the
Midwest was especially suppressed in the first half because of low
livestock prices. These prices have risen in the past two months,
and are approaching breakeven levels after a prolonged period of
losses. High interest rates and low farm earnings are blamed for
sluggish capital spending by farmers. Revised industry projections
put 1981 sales of farm equipment only modestly above the depressed
level of 1980 instead of the strong rebound expected earlier.