Beige Book Report: Chicago
December 16, 1981
Summary
Economic conditions in the Seventh District deteriorated
rapidly in the fourth quarter. Manufacturers of both consumer and
producer durable goods are scheduling extended plant closings in
December and January. Layoffs and short work weeks are increasing.
Demand for workers is very weak. General merchandise and specialty
stores have been trying to boost lagging sales with selective price
discounts. Inflation has also slowed in wholesale markets.
Complaints are widespread about slow payments by trade creditors,
including governmental units. State and local governments are paring
operations because of financial stringencies. The prolonged downturn
in agricultural prices—especially corn, soybeans, and livestock—with no sign of a significant reversal, has raised increasing
concern over the financial viability of farm entrepreneurs carrying
substantial debt burdens. Construction activity is in a depressed
state, except for large office buildings, but there is hope that
lower interest rates next year will increase transactions. The list
of sectors showing continued gains is limited to business services
(especially law and accounting), and medical care and supplies.
Recreational vehicles and mobile homes also have reported gains this
year, but from a low base.
Confidence Ebbs
Important sectors in the Seventh District have had
serious problems for two to three years. (The region had been
reasonably prosperous until early 1979 when the gasoline shortage
hit.) Not since 1929-33 has the region been afflicted by declines of
more than a year or so, and, typically, downturns since World War II
did not strike all sectors simultaneously. In recent months the
malaise has broadened further. Now motor vehicles, most capital
goods, recreational equipment, home appliances, furniture,
agriculture, and government are all in a depressed state. Confidence
has been further eroded by a series of incipient upturns all of
which proved abortive, e.g. farm prices late last year, housing
activity in 1980 and again last spring, and auto sales in August.
These experiences have drained the morale of many who now say they
see "no light at the end of the tunnel". The slump in housing,
building materials, motor vehicles, and farm and construction
equipment is unprecedented since World War II in magnitude and
duration. A growing number of older plants are being closed
permanently. Many small businesses, retailers, distributors, and
component suppliers associated with these depressed sectors are
being pushed out of business or have cut back the scale of their
operations. In short, confidence in the district has suffered a
damaging below which will not be corrected in the short run. Most
observers here expect demand to bottom out in the first half of
1982, perhaps as early as February, but any subsequent upturn
anticipated next year would leave the district far short of full
prosperity.
Inflation
The proportion of purchasing managers reporting paying
higher prices is down sharply from last year. Discounting is
reported for steel, nonferrous metals, scrap iron, and building
materials. Because inventories of materials and components are
typically at very low levels, price cuts are expected to be reversed
as demand revives. The big inflation issue for 1982 is the push by
management for labor concessions on compensation and work rules,
which so far has achieved only scattered success.
Employment
Many district manufacturers normally shut down for a
week between Christmas and New Year's Days. This year many plant
closings will begin before Christmas and extend into January. Other
firms are eliminating extra shifts or reducing work weeks. Plant
closings are reported for farm and construction equipment, motor
vehicles, home appliances, and tires. Some district companies that
avoided layoffs in past downturns have been forced to follow the
trend because of continued declines in orders. White collar staffs
are also being reduced.
Consumer Purchases
Large general merchandise chains reported poor
sales in both October and November, with volume down 5 percent or
more after inflation. This has led to a buildup in inventories, and
a rash of pre-Christmas price cutting, to an extent not seen since
late 1974. Consumers are especially cautious on purchases of big
ticket items, and luxury services such as air travel, restaurant
meals, and recreation. However, merchants have not given up on a
late surge in Christmas sales.
Inventories
Stocks of motor vehicles, appliances, farm and
construction equipment, and most general merchandise are now
excessive because of poor sales. Production cuts have been ordered.
Oil industry inventories have been reduced to comfortable levels.
Manufacturers' delivery times are very short, but most distributors
are working on minimal stocks.
Capital Goods
Virtually all lines of business equipment produced in
the district for farms, factories, offices, and transportation
reported deteriorating demand in recent months. Components such as
castings, forgings, engines, power transmission, and electrical
controls are also affected. Auto companies and electric utilities
have canceled additional major capital spending plans, because of
reduced estimates of demand and financial pressures. On the brighter
side, some large office buildings started in downtown Chicago
earlier this year, but halted for lack of financing, have been given
the green light.
Motor Vehicles
Demand for cars and trucks remained near the
depressed October level in November. Fourth quarter output will be
the lowest since 1959, and schedules for early 1982 have been
reduced. Used car sales, which had been strong, dropped off
recently. Cars at the "high end of the line" are selling best, often
for cash.
Steel
Orders for steel declined sharply in the fourth quarter.
Operating rates dropped back to the severely depressed level of the
third quarter of 1980. All products are now weak, including oil line
pipe. Demand is expected to remain near the December level in
January, with some rebound in February as customers' plants reopen.
Housing
Residential activity is at a post-World War II low
throughout the district. Effective prices are down 10-20 percent,
threatening the equity of many owners. Few potential buyers accept
the concept of variable rate mortgages, particularly if adjustments
are frequent. Recent rate declines stimulated a few transactions. A
drop in the conventional rate to 13-14 percent, analysts believe,
would boost home construction substantially because the inventory of
finished units is very small.