Beige Book Report: Chicago
November 16, 1982
Summary
The region of the Seventh District continues in a deep
recession. The expected "turn" in general activity has not occurred.
On the contrary, most indicators are still declining. However,
morale has been boosted by recent strength in both the equity and
debt capital markets. The election results are not expected to
significantly affect the near-term economic outlook. Easier mortgage
credit has increased sales of residential properties, but from a
very low level. Nonresidential construction is heading down. Output
of durable goods has declined further, but there are signs of a
leveling in nondurables, such as paper. More plants are being
closed, some permanently. Layoffs and terminations of workers are
causing widespread distress. State and local governments are cutting
programs, reflecting financial strain. Retail sales remain weak, but
some merchants are encouraged by trends in recent weeks. Large
harvests and weak demand for grain are placing additional downward
pressure on crop prices and income. District farmland values
declined 5 percent in the third quarter, and 16 percent in the past
12 months.
Purchasing Managers Pessimistic
October reports of purchasing
managers associations in both Chicago and Milwaukee show further
substantial declines in employment, output, new orders, and
backlogs. Rapid deterioration was first evident in these reports in
the fourth quarter of 1981. Since then the downtrend appeared to be
losing momentum at times, thereby raising hopes for a turnaround.
But recent months have shown no glimmer of improvement. Inventories
continue to be reduced generally, but are still viewed as excessive
in some companies. Order backlogs have virtually evaporated for
many. Starting last February, prices paid have averaged lower every
month, an unprecedented development since World War II. (A year ago
price increases substantially exceeded decreases.) An interesting
but disturbing development in October was a moderate deterioration
in vendor performance, attributed to suppliers that have contracted
or closed operations.
Financial Pressures
Most District manufacturers and retailers are
reporting either reduced profits or losses for the third quarter.
Losses are cutting deeply into net worth in some cases, and, along
with heavy debts, are causing reductions in credit ratings, and
associated increases in interest costs. Some companies are reporting
losses and reducing dividends for the first time in decades—since
the depths of the Great Depression in some cases. Managements
stressing "survival strategy" are reducing corporate staff, and
contracting operations by selling or closing divisions. The used
equipment market has been hit by auctions of items from closed
plants, especially in the farm and construction equipment sector.
Capital expenditure programs commonly are being cut back, even when
acquisitions would greatly increase efficiency—e.g. automated
office systems.
Price Cutting
Widespread price cutting prevails to an extent
unknown since the 1930s. Discounting is especially "horrendous" in
steel, nonferrous metals, and building materials. Railroads and
truckers are engaged in "rate wars" now possible under deregulation.
Retailers are offering sharp cuts from list on "designer" apparel,
appliances, and current books. There are also numerous retail
bankruptcy or "liquidation" sales, some of which seem to be on a
sustaining basis. Meanwhile, costs of utility services, local taxes,
insurance, and medical care continue to advance at a rapid pace.
Motor Vehicles
October auto sales declined substantially from
September after seasonal adjustment. After several reductions in
plans, fourth quarter auto output will be well below last year's
poor level. Truck output will be about even. U.S. output is even
weaker than sales because of increased net imports of "domestic"
vehicles from Canada--about four times last year's rate. Independent
suppliers of parts are in deep trouble. Major captive finance
companies recently reduced finance charges substantially. Some banks
also advertise lower charges, but most banks are not vigorously
seeking auto loans. Although auto dealers attack high interest
charges as the main impediment to sales, many potential customers
are deterred by high prices and concern over reliability of new
domestic models.
Capital Goods
The District's important capital goods industries are
in a crisis. Some large, diversified firms are drastically
contracting operations. Some have stopped making certain parts in
favor of purchases from outside. Plant closings appear to be
accelerating. Almost without exception, demand for capital goods is
weak with no sign of improvement, not even for parts and operating
supplies which usually signal the early stages of an uptrend. Some
capital goods producers anticipate no significant change for the
better until well into 1983—perhaps into 1984.
Steel
Demand for steel has declined further against normal seasonal
trends. Chicago-area steel plants are operating at 50-55 percent of
capacity compared to 38 percent for the industry. Chicago and
Detroit have been producing 40 percent of the nation's new steel, up
from 31 percent a year ago. Partly this reflects less import
penetration in the Midwest, but also relatively more efficient
plants. Motor vehicle demand for steel, counted upon earlier to
boost total output in the current quarter, is being reduced further.
Oil and gas industry demand, insatiable a year ago, is now the
weakest sector.
Housing
Home builders report an increase in both traffic and
confirmed sales in the past six weeks. Mortgage rates have declined
about three points since last spring. Because of cold weather
housing starts in the District will not be helped by easier mortgage
credit until next spring. The recent expansion of S&L powers to make
consumer installment loans and business loans may direct a
substantial portion of any savings inflows away from housing.
Officials of some very large S&Ls have vowed never to get "into that
fix again"—i.e. total reliance on long-term assets funded by short-
term liabilities.
Agriculture
Progress of the District's large crop harvests varies
widely. Illinois, Indiana, and Michigan harvesting is well ahead of
normal. In Iowa and Wisconsin, however, harvesting is behind
schedule. Crop prices are seriously depressed, reflecting the record
harvest and reduced projections of both domestic utilization and
export demand. Depressed conditions in agriculture continue to exert
downward pressure on farmland values. District agricultural bankers
report that farmland values declined 5 percent in the third quarter,
and 16 percent in the year ending in September. Further declines are
expected, in part reflecting financial pressures that are forcing
some farmers to liquidate capital assets.