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Chicago: December 1981

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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.