Beige Book Report: Chicago
August 18, 1982
Summary
With the third quarter well advanced it appears that
economic activity in the Seventh District is still declining. Signs
of improvement noted in the spring have evaporated. Consumer
purchases are very slow in virtually all sectors. Capital goods
producers, almost without exception, are cutting output further.
More plants are being closed, many permanently. Motor vehicle sales
continue well below expectations. Normal vacation shutdowns commonly
have been extended. Financial problems are increasing for many
lenders and borrowers. Residential construction is at a postwar low
with no revival in sight, and nonresidential plans are being scaled
down. Demand for workers is weak, but many unions adamantly oppose
significant concessions, and most nonunion employers are increasing
compensation. Analysts were shocked by recent USDA predictions of
record crops, which threaten the financial health of agriculture.
Farmland values are continuing an unprecedented postwar decline.
Financial Stress
Revelations of the extent of problem loans of the
District's largest bank sent a chill wind through the financial and
business community. Most large banks have special teams monitoring
existing loans, and new loans are being scrutinized very closely.
First-half losses of some of the largest S&Ls would wipe out their
book net worth if not checked in the second half. (Actual net worth,
taking into account current market values, is rarely mentioned.)
Many business and agricultural bankruptcies would result if lenders
chose strictly to enforce loan contracts. Liquidations of retailing
and manufacturing establishments without bankruptcy are frequent. A
number of capital goods firms are planning to consolidate two or
more plants, with the survivor likely to be a newer facility in the
Sunbelt.
Capital Expenditures
Machinery and equipment production is
declining or remaining at very low levels, depending on the type.
Demand for equipment for construction, agriculture, industry,
utilities, and transportation is at very low levels. Orders for all
types of capital goods were poor in the second quarter, and some
producers reported a further drop in July and early August. Forging
and casting operations are off 50 percent or more from last year and
dropping further. Employees of 40 to 50 years experience at some
capital goods companies "have never seen anything like this." Some
firms that normally only manufacture complete machines are seeking
repair or retrofit jobs. Over half of the freight car plants are now
closed, and with orders near zero, the ratio may rise to 90 percent
by year-end. Construction engineering firms have reduced staff, and
plant location advisers have relatively few new projects. These
developments suggest that the capital expenditure slump will be long
extended.
Consumer Spending
Consumers are not leading the Seventh District
out of its recession. Large general merchandise retailers report
dollar sales about equal to last year in July and early August in
dollars, and significantly lower in real terms. Customers generally
respond only to price cutting and strong promotions. The only
consistently strong line is auto repair and service, reflecting the
fact that people are holding on to cars longer. Airline traffic in
July was 8 percent below March, seasonally adjusted, because of
reduced vacation travel. Resort areas have much larger vacancies
than in past years.
Labor Negotiations
Unions are strongly resisting attempts of
management to obtain concessions on wages, benefits, and work rules.
On August 1, just after negotiations broke off in the steel
industry, contract provisions automatically boosted average total
compensation of production workers by about 75 cents per hour to
$22.50. (Over one-third represents nontaxable benefits.) This
multiplies out to almost $47,000 per year. For Ford and GM the
comparable figure is almost $45,000. Chrysler workers have rejected
virtually all new management proposals to cut costs and are
demanding a return to "parity." Various managements dependent on
autos and steel have decided that survival for their corporations
requires scaling down operations, diversification into unrelated
fields, and turning to foreign sources for major components such as
engines and transmissions.
Housing
Residential construction continues near rock bottom with
the year 1982 now "written off for lost." New units being built, in
the main, are either ordered by well-financed buyers or are
subsidized rental units. Used home sales are very slow. One survey
indicates that actual selling prices in the Chicago area, adjusted
for special lending terms, are down 8 percent from last year, but
there are reports of auctions bringing cuts of 25 percent or more.
Average quoted mortgage rates on conventional loans are 16.5 to 17
percent, but almost no loans are being made on these terms. Most
lending activity involves short-term loans, "blended rates" and
second mortgages. There are reports of "balloon" notes coming due
with refinancing difficult to arrange.
Nonresidential Construction
Vacancy rates for first-class downtown
Chicago office space increased sharply in the second quarter. New
space is coming on the market rapidly, and needs of some renters are
shrinking. Some proposed new buildings, put up for bids only
recently, have been postponed or canceled. Leasing agents are
offering attractive concessions to sign tenants, suggesting the
downtown building boom is collapsing. The suburbs have had
substantial excess office space for at least a year.
Agriculture
Crop prices had declined in recent weeks in
anticipation of bumper corn and soybean harvests. Nevertheless,
analysts were surprised by the very large production estimates
released August 11 by the USDA. Excepting Iowa, record corn and
soybean harvests are forecast for all District states. The five
District states account for 55 percent of the nation's corn and over
40 percent of its soybeans. The implications of the large crop
forecasts for District farmers, agricultural lenders, and
agribusiness are ominous. Already burdensome carryover stocks of
corn and soybeans will rise substantially, and crop prices, at
unprofitable levels for several months, are likely to decline
further. Because of limited compliance with the government's program
only a small portion of the corn crop will be eligible for CCC price
support loans. District farmland values, off 10 percent in the past
year, probably will decline further. Farm equipment sales probably
will remain depressed.