Beige Book Report: Chicago
September 30, 1981
Summary
Economic activity in the Seventh District shows no signs of
the revival that had been hoped for by this time. Orders for capital
goods have slowed further. Inventories are being held at low levels,
and reduced further. Retail sales of general merchandise slipped
back in recent weeks. Employment prospects are bleak, but
compensation continues to rise rapidly. The housing market dropped
even lower in late summer. Excellent crop forecasts reduce farm
income prospects. Financial markets are strained, but credit is
available to qualified borrowers. Some important district companies
are experiencing severe financial problems. Despite the generally
gloomy outlook, we do not detect signs of a sudden sharp drop in
total activity such as occurred in the fall of 1974 and the spring
of 1980.
The tax act
District executives are carefully examining the
complicated Economic Recovery Tax Act to determine how it might
affect demand for their products and their own investment plans.
Faster depreciation, liberalized investment tax credits, and other
tax reductions are expected to have a distinct positive impact on
the demand for capital goods, but only after some easing of credit
terms and clarification of uncertainties, here and abroad.
Attitudes
Surveys and public statements indicate that confidence of
consumers, businessmen, farmers, and lenders eroded in the third
quarter. For many this reflects a failure of the upturn to appear as
predicted rather than a sharp decline in income and sales.
Companies in trouble
Some large district corporations are hard-
pressed financially. Facilities are being closed or offered for
sale, work staffs are being trimmed, payments delayed, and debts
restructured.
Capital expenditures
Order backlogs of most capital goods producers
are declining and further cuts in output are probable. Order
cancellations have become more common. Included are equipment for
agriculture, construction, railroads, trucklines, and various
factory facilities. The motor industry has deferred various large
projects for new products. A large nuclear power plant has been
canceled and construction of other power plants is in doubt. On the
other hand, some well-financed capital goods producers are going
ahead on schedule with programs for new products.
Inflation
Price discounting is reported for building materials,
metals, gasoline, and some capital goods. However, most district
companies are paying higher prices on average each month. Prices
that are depressed currently could recover lost ground rapidly if
demand strengthened.
Inventories
Stocks of steel, non-ferrous metals, building materials
and various equipment components are below comfortable working
levels. Nevertheless, an "inventory squeeze" is in progress under
pressure from financial executives who wish to improve year-end
balance sheets and reduce borrowing costs. Fortunately, low
inventories reduce the chances of a cumulative recession, and
improve prospects for an upturn after the turn of the year.
Employment
District employment continues to lag the national
performance. New layoffs have been announced in various industries,
but the real problem is reduced hiring by both industry and
government.
Compensation
Increases in compensation in the district have
averaged close to 10 percent this year, despite substantial
unemployment. Most employers are budgeting similar increases for
1982. Some compensation increases have been much larger.
Construction equipment operators recently accepted a 14 percent
first-year increase after a long strike. Truckers and the steel and
auto firms are pressing hard to moderate increases in compensation,
especially COLA clauses, but strong union resistance is certain.
Consumer purchases
General merchandise retailers report that sales
weakened in the summer after showing strength in the spring.
Weakness is "across-the-board", but has been most pronounced in big
ticket items including appliances and furniture.
Motor vehicles
Sales of cars were stimulated artificially in August
and early September by rebates and interest subsidies. Although
inventories were reduced significantly, production schedules for
both cars and trucks for the fourth quarter have been cut.
Steel
Demand for steel has ebbed and, shipment estimates have been
reduced. The main cause is lower demand from the auto industry, but
inventory reductions are in progress in most industries. Leadtimes
are very short.
Housing
Sales of both new and used housing have sunk to an
extremely low level. Many builders and subcontractors have gone out
of business and others are expected to follow. Most builders are
building only to order, and orders are few. An unusually high
proportion of mortgage loan applications are being rejected because
potential borrowers are unable to meet credit standards. The housing
slump is expected to continue into next year.
Nonresidential construction
Most heavy construction in the Chicago
area was halted by an equipment operators' strike that began July 20
and lasted eight weeks. Many projects will be pushed ahead with long
hours at overtime to make as much progress as possible before bad
weather hampers operations. Contract data suggests a decline in
nonresidential construction next year.
Agriculture
Abundant summer rains raised estimates of yields on
principal crops. With the exception of Indiana, prospects for the
district are especially good. Corn output in the district is
expected to set a new record while soybeans are likely to match the
1979 record. Depressed crop prices suggest very low earning for
farmers for the second year in a row and analysts do not expect a
significant improvement next year. This means continued depressed
sales of equipment and other items to farmers.
Financial
Extremely high interest rates continued to dampen
activity in most sectors. But credit remains available to borrowers
who can meet strict standards, in contrast to the situation in the
spring of 1980. Hopes for an early, substantial decline in interest
rates are fading. Local analysts complain that credit demands of the
federal government and the energy sector crowd out many other
borrowers. The new "All Savers" certificates are being promoted
actively, but little benefit for housing is expected. A decline of
three or four points in long-term rates, we are told, would
stimulate a surge of demand for funds for home mortgages,
corporations and municipalities.