Beige Book Report: Chicago
August 11, 1981
Summary
Economic prospects for the Seventh District have
deteriorated in the past month or two—at least for the short term.
Most observers still anticipate improvement late this year and in
1982. Current high interest rates clearly are dampening many
activities. Forecasts for a number of sectors have been scaled down.
However, there is little fear of a precipitous decline such as that
of the spring of 1980. The new fiscal package is viewed favorably by
most executives, but no substantial early benefits for business are
foreseen. Demand for workers is very weak, but some unions have won
large gains in compensation and labor unrest is rising. Consumer
outlays apparently slowed in July. The higher value of the dollar
has encouraged some imports and discouraged some exports.
Residential construction remains depressed and some nonresidential
projects have been postponed. Crop prospects are favorable, but farm
income continues weak.
Business attitudes
Important district industries have scaled down
their forecasts for the remainder of the year. Included are
agricultural, construction, and industrial equipment; motor
vehicles, electronics, cement, steel, paper-board, and the airlines.
Purchasing managers reported declines in employment, new orders, and
backlogs in July.
Value of the dollar
The higher exchange value of the dollar has had
some impact on imports and exports. A number of exporters attribute
a decline in demand from Western Europe to this development. The
local Department of Commerce office notes a substantial drop off in
inquiries from abroad concerning availability of U.S. products.
Employment
Despite improvement from last year's depressed level in
some sectors, particularly motor vehicles, payroll employment in our
five-state area was 4 percent below two years ago in June, compared
with a rise for the nation. Total employment was off at least 5
percent in the two year comparison in Indiana, Iowa, and Michigan,
and manufacturing was off more than 11 percent in these states.
Help-wanted ads are about at last year's reduced level. Employers
report very heavy response to ads for vacancies of various kinds.
Very few employers, public or private, are hiring actively.
Labor unrest
Despite slack job markets, various labor groups have
obtained large gains in recent negotiations. In the building trades,
carpenters, cement masons, and laborers won 10.5 percent first year
increases in wages. Heavy equipment operators struck on July 20 in
the Chicago area after turning down an offer of a 12 percent
increase. Chrysler workers, having accepted wages well below those
paid by competitors, are aggravated at reports of salary boosts for
executives and designers.
Inflation
Prices of petroleum products are down slightly, and
cement is off sharply. But most prices continue to rise. In July, 68
percent of reporting Chicago-area companies paid higher prices than
in June and only 2 percent paid lower prices, a marked acceleration
compared with a year ago. Business equipment prices will average at
least 10 percent higher this year. Even larger increases are being
reported for utilities and mass transit.
Inventories
Further involuntary increases in inventories have
occurred in motor vehicles, farm and construction equipment, and,
possibly, steel. Most other retailers and manufacturers insist
stocks are under close control.
Capital goods
Prospects for a revival in demand for equipment have
dimmed. Particularly weak demand is reported for machine tools
(although backlogs are substantial) and equipment for agriculture,
construction, railroads, and trucklines. The construction equipment
outlook is grim, and smaller and weaker companies are forced to
consider sales of plants or mergers. Oil field equipment and
apparatus for regulating energy consumption in buildings are among
the few bright spots.
Motor vehicles
Third quarter output schedules for both cars and
trucks have been reduced because of poor sales. Layoffs are rising
again because of model changeovers and extended summer shutdowns.
Steel
Steel executives have grown less optimistic about demand this
fall. Service centers are buying steel more cautiously. Operating
rates for Chicago-area mills are generally higher than for the
nation because facilities are more modern on average and because
imports are less of a factor here.
Consumer buying
Domestic auto sales are lagging last year's poor
level, and manufacturers are offering rebates and subsidized
interest to attract customers. A very large general merchandiser is
pleased with sales gains in July and early August, but some of its
competitors have done less well. Price competition is reflected in
reduced profit margins. Airline traffic was down 8 percent in June
and 6 percent in July. The major airlines were in serious trouble
before the devastating controllers' strike.
Housing
The housing market remains depressed throughout the
district. Chicago-area permits in the first half were up 37 percent
from last year, but 78 percent below the 1977 peak. Mortgage rates
are in the 17-18 percent range plus 3 points and fees. Few potential
buyers can manage the high monthly payments. S&Ls are now offering
AMLs, some exclusively. Much of the lending activity at S&Ls
involves transfers of existing loans with "blended rates", and a
variety of novel features. Some S&Ls have been forced into joint
ventures with builders to avoid foreclosing on projects.
Nonresidential construction
Since July 20 the equipment operators'
strike has halted work on many projects in Northern Illinois.
Starting last spring many smaller commercial projects were postponed
because of high interest rates. In July work was stopped on two
large buildings for similar reasons. Foreign investors are providing
financing for large downtown buildings in increasing volume.
Agriculture
District crops are rated "good to excellent" following
near ideal weather. Harvest estimates have been scaled upward. Crops
in the eastern Cornbelt remain vulnerable to an early frost because
of late plantings. Corn and soybean prices are now well below year
ago levels. Export demand remains sluggish. District farmland values
rose about one percent in the second quarter to a level almost 14
percent above year ago. (These prices have quadrupled since 1973.)
The slower rate of increase in the first half is attributed to low
farm earnings and high interest rates. District agricultural banks
have ample funds, but loan demand remains slow. Loan rates at these
banks are at a new high and are above the rates charged by other
farm lenders.