Beige Book Report: Chicago
September 29, 1982
Summary
The expected upturn in economic activity has not developed
in the Seventh District. Purchasing managers in Chicago and
Milwaukee reported further declines in shipments, orders, output,
inventories, and employment in August with no indication that
September would see improvement. State and local governments are
also cutting staff. Projections of demand for motor vehicles and
steel have been reduced again for September and the fourth quarter.
Although some producers report a leveling off in orders, most
capital goods producers have laid off additional workers and more
plants have closed. Retail sales remain slow with no help from
"back-to-school" buying. Although lower interest rates have not
helped housing materially, some improvement in "attitudes" is
reported. Expected record corn and soybean harvests will keep prices
low and increase financial pressures on the farm sector. However,
mainly because of lower feed costs, the outlook has improved for
livestock farmers, especially hog producers. Also on the upside are
sales of grain storage bins and equipment to handle the excess
production. A scattering of defense procurement orders is providing
a few jobs. Inflation continues at moderate rates with heavy
discounting in wholesale and, to a lesser extent, in retail markets.
Forecasts Reduced
District businessmen and lenders are losing hope
that a revival in activity will occur in the remainder of 1982.
Particularly for capital goods and heavy construction, doubts are
increasing that a recovery will be manifest before mid-1983 at the
earliest. Lower interest rates will not have as large an impact as
in earlier cycles because of substantial unused capacity, financial
stress, and abysmal morale. Even service industries such as
medicine, advertising, and law note the effect of hard times.
However, firms specializing in bankruptcy procedures—accountants,
lawyers, and liquidators—are doing a booming business. Complaints
of past due accounts, business and consumer, are much more common
than in past recessions.
Employment and Wages
New claims for unemployment compensation
continue at high levels. Many employers, including governmental
units, are cutting staff. New hires generally are held to the
minimum necessary to fill essential slots. Help-wanted ads bring a
flood of resumes and some employers prefer to fill openings by
transfers from within or on personal recommendations. Many companies
have frozen or reduced salaries this year. Where increases have been
granted, the 7-8 percent range predominates, down from 9-10 percent
in past years. Current plans are for much smaller increases in 1983.
Consumer Expenditures
Retailers reported disappointing sales of
most soft and hard goods in August and September. "Back-to-school"
promotions did not bring the normal response. Nevertheless,
children's merchandise—clothing and toys—is generally doing better
than adults' merchandise. Appliances, carpets, and other home
furnishings are especially weak, a trend attributed, in part, to
reduced sales of houses. Auto parts and service and video games
continue to be star performers. Larger chains report favorable
delinquency experience, but more careful monitoring of accounts has
been necessary. Because of slow sales, retail inventories are
adequate to excessive, and ordering of goods for the winter season
is well below normal. Closings of stores and fast food operations
are increasingly frequent, and few new outlets are being added.
Capital Expenditures
The recession in business equipment is in full
swing. Layoffs in many plants have reached 20 to 50 percent of the
peak force, with high seniority hourly workers and white collar
types affected to a much greater extent than in earlier postwar
recessions. Some farm and construction equipment plants will be
closed for most of the fourth quarter with reopening tentatively
scheduled for January. Most rail freight car plants are closed
indefinitely. One heavy truck plant is closed and may not reopen. A
machine tool producer sees no pickup in the current low level of
demand until late 1983. Imports are taking a growing share of the
markets for machine tools and farm and construction equipment,
helped by the high value of the dollar. Export demand is restricted
by limited availability of government financial aid, compared with
foreign competitors. Low demand for services of plant location
advisers, architects, and design engineers suggests that the capital
spending slump will be deeper and longer than in earlier cycles.
Motor vehicles
Some auto and truck plants are closed to cut
inventories at a time when production is usually at high levels to
supply dealers with new models. On September 1 stocks of 24 domestic
models exceeded 100 days supply, an unprecedented situation. Price
incentives have been pushed to move the large carryover of 1982
models--and some 1981s. Meanwhile, various imported models are in
short supply. Even the new domestic compact trucks, strong sellers
earlier in the year, have slumped in recent months.
Steel
One forecast of steel shipments for 1982 has been reduced to
the 60-65 million ton range, lowest since 1958. Demand for steel
continues at extremely low levels. All products are weak, but
structurals and heavy plates for capital goods are "terrible." Oil
field steel has plummeted in an unprecedented fashion. The only
improved demand categories are ordnance and grain bins.
Defense Procurement
The principal facilities devoted exclusively to
defense procurement in the Seventh District are a tank arsenal, an
electronic counter-measures plant, and the Rock Island Army Arsenal.
In addition, District companies have obtained orders for small naval
vessels, armored cars, personnel carriers, fuel trucks, special rail
cars, communications equipment, aircraft engine parts, and a variety
of other components. Overall, however, this region is not sharing
proportionately in the defense buildup.
Agriculture
Projected record corn and soybean harvests, as in 1981,
will exceed utilization and augment already burdensome carryover
stocks. Corn and soybean prices have declined sharply in
anticipation of the expected surplus production and are expected to
remain well under the low year-ago levels. Many District crop
farmers will remain in the grip of a cash-flow squeeze, partly
reflecting the small proportion of farmers eligible for government
price supports on their 1982 crops. Prospects for livestock farmers
have improved. High prices and low feed costs have generated large
profits for hog farmers. Cattle prices have weakened in recent
weeks, but low feed costs and reduced finance charges suggest that
cattle feeders will be able to cover production costs.