Beige Book Report: Chicago
March 23, 1982
Summary
Seventh District economic activity continues very
depressed. However, better weather conditions after mid-February
aided a revival in some sectors. Retail trade continues slow.
Further layoffs have occurred in a wide variety of employment
categories. Equipment manufacturers report further weakness in
orders. Construction industry prospects have deteriorated further.
High interest rates, heavy debt burdens, and reduced cash flow have
placed many business and financial enterprises in precarious
positions. State and local governments are budgeting severe
restrictions on spending. It appears that the general economic
decline has moderated. A few sectors report gains in recent weeks,
including steel, light trucks, office equipment, and airline travel.
All types of goods and services are readily available, and price
discounting is widespread. Pressures are strong to cut production
costs, especially labor costs. Agriculture faces another year of
depressed income, especially if crops are as large as expected. Bank
loans to business remain strong, but more doubtful credits are
requiring special attention.
Confidence Weakens
Recent surveys of business and consumer
attitudes in district centers show a further erosion of confidence.
The region has been plagued by a three-year recession which has
seriously depressed morale, especially for those who have never
experienced an extended period of trouble. For the general public
the main concern is loss of income and scarce job opportunities.
Executives, in addition to worrying over their own companies'
problems, are disturbed over huge prospective federal deficits and
high interest rates. Low morale, even fear, is deep and widespread.
The Oil Glut
Price declines for crude oil and most oil products,
especially gasoline, have surprised many analysts. Ramifications
have been profound. Pressures to develop alternative fuels have
subsided. More refineries are being closed. A growing surplus is
noted for line pipe and oil field equipment. Demand for diesel-
powered vehicles has eased, EPA-MPG may be deemphasized, and the RV
industry's prospects have improved.
Employment
In January, payroll employment was 3 percent below a
year earlier in the district, while the nation was about even.
Compared with January 1979, when this region was relatively
prosperous, district employment was down 5 percent, while employment
in the nation was ~ 3 percent. All the district states compare
unfavorably with the nation, but the hardest hit are Michigan,
Indiana, and Iowa. The principal sectors accounting for the plight
of district states are motor vehicles and agriculture. State jobless
pay funds in Michigan and Illinois are heavily indebted to the
federal government. Wisconsin borrowed recently and Iowa expects to
do so.
Job Opportunities
Demand for workers is very soft. Information that
a company is hiring brings a flood of applicants. State unemployment
compensation offices open to long lines and operate at capacity.
Help-wanted ad lineage in Chicago papers is running about 25 percent
below last year, and more than 50 percent below two years ago. State
and local governments are cutting staff, including employment
service offices. Labor management negotiations similar to those
publicized in the auto and trucking industries are widespread.
Various companies have reduced compensation for white collar workers
and executives, hoping to achieve the same changes in union
contracts in upcoming negotiations.
Inflation
Price inflation has slowed significantly. Trucking rates
have been reduced, and the advance in rail rates has slowed. Auto
companies have demanded 2 percent, across-the-board price reductions
from suppliers who, in turn, passed similar demands on to their
suppliers. Purchasing managers are asking price concessions and
threatening to change sources, instead of accepting price increases
passively. However, costs of shoes, medical care, tuition, and
utility services have continued to rise at a very rapid pace.
Inventories
Inventories of oil, paper, general merchandise (at
retail), farm and construction equipment, and some autos are
excessive because of poor sales. Holdings of steel, nonferrous
metals, building materials, and components are quite low. Buying is
hand-to-mouth, to a degree unknown in recent years. A pickup in
final demand could quickly tighten the lines of supply, increase
orders to factories, and moderate intense competition.
Capital Spending
Construction contracts, orders for producer goods,
and announcements by various companies suggest a sharper reduction
in capital spending than the one percent drop projected by the
government survey. Various projects have been shelved in the steel,
vehicle, and utility industries. Producers of pipelayers and
bulldozers are protesting the ban on sales to Russia.
Motor Vehicles
Auto sales were very weak in recent weeks, despite
rebates. Light truck sales responded to rebates and were up 20
percent in February, but heavy truck sales were down 17 percent.
Production of vehicles has declined more than sales and schedules
appear somewhat firmer. The third quarter schedule is above last
year's.
Steel
March saw a slight improvement in steel shipments from the
very depressed level of February. April is expected to continue this
trend. Inventories of steel users are very low relative to usage.
Normal lead times of 6-10 weeks are down to one week in some cases.
Retail Sales
Consumers have been holding back on spending, either
because of reduced income or increased caution as to future income.
Installment credit use is below normal. Among the few lines selling
well are video games, video recorders, auto supplies, and children's
merchandise.
Construction
Permits for new residential units have been close to
zero. There is much concern over problems of rolling over short-term
home mortgage financing. While nonresidential prospects also are
generally poor, at least three large new office buildings have been
cleared for construction in downtown Chicago. Rehab work on older
buildings has been stimulated by tax benefits. The public sector
outlook is very bleak, for two years ahead.
Agriculture
Pessimism in the farm sector is deep and widespread.
This year's rise in farm production costs will be modest, but net
farm income probably will decline significantly from the depressed
levels of the past two years. Farmers are holding back on all types
of outlays. Most farm lenders are confronted with loan collection
problems, but these are generally considered to be manageable.