Beige Book Report: Chicago
February 2, 1983
Summary
The fourth quarter brought further declines in economic activity in the Seventh District, but some faintly encouraging developments began late in 1982 and have continued in January. The overall decline in employment appears to be leveling off and some callbacks of laid-off workers have been announced, principally in the automotive sector. Steel orders have improved modestly, from a record low. Residential activity has been improving, from a very depressed level, and the uptrend is expected to continue. Scattered defense orders are helping some hard-pressed companies. Inventory liquidation appears to be coming to an end with some rebuilding in prospect. Discounted prices are firming up in some wholesale markets. Finally, unusually mild winter weather has boosted morale, held down heating bills, and permitted pouring of foundations for new housing in January—a most unusual development.
On the negative side, the record slump in producer goods demand is still underway with no recovery in sight. An unusual number of business activities are being liquidated—factories, retail stores, and trucking operations. New hiring remains at a very low rate. State and local governments are grappling with unprecedented budget deficits. Agriculture, plagued with low prices and a huge overhang of crops, faces another bleak year, but PIK introduces a more optimistic outlook for 1984.
Mild Weather
Through mid-January, heating degree days in major District centers have been about 20 percent below last year and 12 percent below normal (the average for 1940-70). Milder weather has about offset increases in natural gas and electricity prices for most users. Nevertheless, many households are delinquent on utility bills, and there are strong pressures to provide subsidies and/or stop shutoffs of service. The absence of the extreme cold and storms of most recent years may cause some seasonally-adjusted data, to appear strong.
Inflation
During the past year, wholesale prices have been discounted over a broad range of items, heavily in some cases such as steel. Many producers must raise prices if they are to remain in business. Despite some concessions, labor costs continue to rise. Productivity has been adversely affected by short production runs. Gasoline and heating oil prices continue to soften, but some wholesale prices are beginning to "firm up”, most notably residential building materials. Because most list prices have remained stable, it is probable that neither the discounting of prices nor the recent firming will be fully reflected in the price indexes.
Employment
In late 1982 total payroll employment was the lowest since 1975 in Illinois, Indiana, and Iowa, and the lowest since 1971 in Michigan. Manufacturing employment was the lowest since 1940 in Illinois and Michigan, and the lowest since 1949 in Indiana. The decline in employment appears to have slowed, and there have been scattered callbacks of laid-off workers. Many plants will stretch work weeks rather than hire workers if demand increases. Reductions in force are still being announced in usually stable sectors, such as public utilities, hospitals, insurance, and state/local government. Companies that have drastically cut overhead staff to lower breakeven points will be reluctant to rehire, even if work pressures build up.
Steel
Orders for steel have increased somewhat in the past several weeks, mainly from the auto sector. Inventories of steel users are low and their operations depend on very short delivery schedules. Steal mill operating rates have improved, but remain below breakeven points.
Motor Vehicles
First-quarter passenger car production schedules are one-third above last year, and light truck schedules are up moderately. Orders to suppliers have increased—steel, engines, tires, moldings, and fasteners etc. Demand for full-sized, fully-equipped models has increased to the point that some models are in short supply, but production must be limited to satisfy CAFE ratios.
Capital Goods
It looks like a bad year for machinery and equipment of virtually all types, for many the worst since the 1930s. Operating rates are so low at some plants that work cannot be scheduled efficiently. There is a large supply of finished mobile equipment for agriculture, construction, and transportation, and much used equipment is idle and available for purchase. Some diversified capital goods producers have shrunk operations to small fractions of peak levels and plants are still being closed and dismantled. Some historically strong companies that have defaulted on debts hope for a pickup in demand to avoid formal bankruptcy.
Construction
Home building has been trending upward for several months and the rise is expected to continue. Favorable weather is permitting construction to proceed at an unusual pace. There is no significant inventory of unsold units. Nonresidential construction will be down significantly this year.
Consumer Purchases
Auto sales have increased in the past two months. Partly this reflects more favorable finance terms, but dealers say that the underlying tone of the market has improved. General merchandise sales, especially apparel, have been hurt by unseasonably warm weather. Nevertheless, there was little overhang of goods at retail because merchants had been ordering very cautiously for the past six mouths. A life insurance company reports that one-third of the funds withdrawn recently by policy holders have been used to pay living expenses.
Government
All five district states have serious budget problems. Michigan, particularly, is in desperate straits. Revenues have fallen below expectations, federal grants have been reduced, income support burdens have increased, and various essential public works projects are scheduled. In some states with constitutions forbidding deficits, accounting subterfuges have hidden the extent of the problem. Income and sales taxes have been, or will be, raised. Scheduled property tax relief may be postponed. State grants for municipal services, including schools, must be slashed. With municipal unions attempting to increase or maintain salary scales. further personnel cuts are probable. In summary, the state and local sector will be a drag on any recovery in the private economy in 1983.
Agriculture
Conditions are still very depressed in agriculture. However, the recently announced "payment in kind" (PIK) program provides optimism for the longer-term perspective. A high level of participation in PIK and other programs limiting crop acreage is expected. With acreage reduced substantially, marked declines will occur in farm purchases of seeds, fuel, fertilizer, and pesticides. The price response this year to reduced acreage may be limited, but with far more farmers eligible for price support benefits, cash income in 1984 is expected to improve considerably.
District farmland values continued to erode in the fourth quarter. Since the downturn began in the fall of 1981, values have declined nearly a fifth to the levels of the late 1970s. Farm real estate transactions remain at a low volume.