Beige Book Report: Chicago
December 15, 1982
Summary
The sorry state of economic conditions in the Seventh
District reported in earlier Redbooks has not improved. Employment,
output, and new orders in the manufacturing sector continued to
decline in November. Normal plant shutdowns over the holidays
commonly will be extended. The retrenchment in capital goods is
unprecedented in the postwar era. The industrial base of the
equipment and automotive industries is contracting as more plants
are closed. Retail sales continue sluggish, with the Christmas
season disappointing so far. Residential construction should improve
significantly in 1983 if interest rates stay down. The heavy
oversupply of new office space is causing rents to decline.
Widespread price cutting in wholesale markets frequently means sales
below cost. No sign of improvement from depressed levels is noted in
the agricultural sector. Business demand for short-term funds is
down sharply.
Business Sentiment
Chronic hard times are taking a toll in reduced
long-term confidence for both managers and workers. Morale has been
depressed by abortive improvements in demand, which were assessed,
erroneously, as heralding solid revival. In the past month, District
analysts in retailing, paperboard, and cement have noted the
evaporation of what had appeared to be promising signs. The Chicago
Purchasing Management Association summarized the views of its
members on December 7: "The expected recovery has not materialized.
All key indicators remain strongly negative."
Lower Break-Even Points
Some companies are confident that they can
maintain profitability at sharply reduced levels of operation.
Break-even points have been drastically lowered by large, permanent
cuts in personnel, closing of marginal facilities, sales of
unprofitable divisions, scaling down operations by purchasing more
parts and services, elimination of less essential functions, and
stringent cost control. Such restructuring could bring rapid
increases in profits if and when revenues rise significantly.
Consumer Purchases
General merchandise retailers have been unhappy
with Christmas sales after a promising start in November. Part, but
not all, of the shortfall is attributed to unseasonably warm weather
in some weeks, including early December. Virtually all product lines
are slow. One large chain has increased sales of household durables
by heavy promotions. The largest airline reports passenger traffic
up substantially since August, but this reflects bargain fares and
free bonus flights
Employment Losses
Payroll employment in the five Seventh District
states in the fall was 8 percent below the same period of prosperous
1976, while employment in the U.S. was one percent higher.
Manufacturing employment in the District was down 25 percent in this
comparison. Michigan, of course, has the largest decline. Wisconsin,
specializing in capital equipment, has the smallest decline in the
District, but its situation has deteriorated very rapidly in the
past 12 months. Many manufacturing jobs are gone forever as plants
have been closed.
Jobless Funds
State jobless pay funds have been strained as
unemployment has remained at high rates for extended periods. The
Illinois and Michigan funds each have debts of almost $2 billion to
the federal Treasury. Debts of Iowa and Wisconsin are growing.
Indiana, despite its severe unemployment problem, has no such debt
because of legal restrictions. Proposals to raise employer
contributions to jobless funds are opposed as likely to encourage
additional migration of industry.
Labor Negotiations
The Caterpillar strike that began October 1 has
affected many smaller companies that supply components. Management
insists that substantial labor contract concessions must be made to
reduce an estimated 40 percent cost advantage held by foreign
competitors. The Chrysler dispute apparently is being resolved, with
the UAW winning its key demand for an immediate wage hike. With the
year drawing to a close, it appears that, by-and-large, organized
labor is winning its fight to prevent "take-aways of hard-won
gains". (The rank-and-file has been more adamant against concessions
than union leaders.) Unfortunately, the failure to cut unit
production costs substantially in major hard goods industries
implies a further erosion of the region's industrial base as
producers step up efforts to seek foreign sources for components or
finished goods.
Inventories
Although most businesses are still attempting to cut
inventories, holdings remain excessive in lines where sales have
been even weaker than expected, e.g. apparel, paperboard, and some
motor vehicles. Nevertheless, inventories will have to rise in some
sectors, including residential building, if demand increases only
moderately. A major producer of diesel engines that are mainly used
in heavy trucks has recalled some workers. Demand for trucks has not
improved, but engine production had been below usage and inventories
had been exhausted.
Capital Goods
Prospects for business equipment in the Seventh
District are even worse than in earlier months. Conditions vary by
company and line but, overall, no earlier post-war recession was
nearly so bad. Bookings are off 10 to 65 percent from reduced levels
of a year ago at various companies. One diversified equipment
producer is operating at 50 percent of capacity, while another is at
25 percent. Castings production also is at about 25 percent of
capacity. Foreign demand, which had been relatively good for some
products, has ebbed in recent months. Among the worst lines are
equipment for railroads, trucking, agriculture, construction,
mining, and metalworking. Capital goods firms have drastically cut
corporate staff, including those in design and development, to an
extent that could harm competitive positions in future years.
Motor Vehicles
The spurt in auto sales in November, aided by
favorable credit terms, is not regarded as a clear indication of an
improvement in demand. Some auto dealers dislike temporary incentive
programs, because sales almost invariably decline afterwards.
Instead, they would prefer lower prices.
Steel
Steel demand remained very depressed in December. Bookings
are beginning to show up for January, but probably because of the
desire of customers to have inventories at rock bottom for year-end
financial statements. Steel companies have learned that customers'
normal holiday shutdowns will commonly be extended into January,
perhaps into February.
Construction
While residential building is expected to increase
significantly in the new year, nonresidential construction is almost
certain to be down. Capital expenditure programs are being canceled
or stretched out by manufacturers and public utilities. The glut of
new office space in the Chicago area has caused rents to drop by 11
percent in the past year. A large office leasing firm has filed for
bankruptcy because of its liability on blocks of space contracted
for at rates above the current market level.