Beige Book Report: Chicago
August 10, 1983
Summary
The outlook for total business activity in the Seventh District is
still favorable, but there are disturbing signs. Most important, the
modest recovery in housing is seriously threatened by recent
increases in mortgage interest rates. Secondly, the District's
important producer goods industries have shown only scattered gains
from abysmal levels. Inventories remain lean, overall, and are not
expected to increase significantly because of ready availability of
new supplies.
Increases in total income and employment in the District since last December have lagged the nation. District employment had declined much more sharply from the prosperous levels of the late 1970's than the national total and: this gap has widened further. The strongest sectors have been home construction, full-sized autos, light trucks, furniture, appliances, recreational vehicles, and defense equipment. But most of these are far below past peaks. Paperboard shipments have increased in line with the general economy. Steel shipments will be up in 1983, but probably less than had been anticipated earlier. Retail sales are well above last year, with both hard and soft goods aided by hot weather. Among construction materials, demand for gypsum board is strong for both residential and nonresidential uses. Prices are rising again, on average, but no resurgence of general inflation is foreseen in the months immediately ahead.
Corn and soybean crops in the Corn Belt have been damaged significantly by several weeks of hot, dry weather. Yields will be down at least 8-10 percent, possibly much more if conditions do not improve soon. While the effect of lower crop yields on farm income is probably positive, farmers have sharply reduced purchases of operating supplies in line with reduced needs.
Heat Wave
Most of the District has been afflicted by unusually warm weather
since mid-June. Effects on economic activity have been multiplying.
Retail sales of summer merchandise have been stimulated. Electric
power consumption, mainly because of air conditioning, has set new
records, with electric bills further inflated by high summer rates.
Traffic through housing developments was reduced, in the opinion of
builders. Finally, crop damage from hot, dry weather is the largest
in years.
Mortgage Credit
The rise in the FHA/VA rate from 12.5 to 13.5 percent, effective
August 1, merely recognized the increase that had already occurred
in market rates. The going rate on 30-year conventionals is now 14-14.5 percent, up almost a full percentage point in the past month,
and up two points since early May. The rise in mortgage rates has
taken many potential buyers out of the market. Unless rates decline,
the peak in housing probably is at hand if not already passed. Some
S&Ls report a drop of 40 to 50 percent or more in loan applications
since May. Total transactions are not off this much because mortgage
bankers (and some S&Ls) are achieving increasing success with
programs to sell home buyers on various types of adjustable rate
mortgages.
Construction-Residential
Building permits for housing, which remained at improved levels
through June, may have slipped in July. In the first half, single-family permits in the Chicago area were more than triple last year's
level, but apartment permits were up less than 20 percent. Despite
the large increases from last year, single-family permits were only
half as large as in the comparable period of 1977 (the record
level), while apartment permits were only one-fifth as large.
Producer Equipment
Experience of producers located in the Seventh District generally
does not reflect the improvement indicated by national aggregate
data on orders, production, and purchases of equipment. The
difference is traceable to the relatively small involvement here in
electronic equipment—data processing, communications, and robotics—which is doing well. There has been a small rise in demand for heavy
trucks and trailers, but demand for most types of equipment for
construction, agriculture, electricity generation, railroads,
mining, oil and gas well drilling, materials handling, and
metalworking has remained very slow. In some cases operations are at
the lowest level since the 1930s. Some plants are closed for good
and others have been idle for 6 months or more at a time. Domestic
producers of equipment often have large margins of excess capacity,
and much good used equipment is available. In addition,, there have
been sharp declines in exports to OPEC nations. Imports have
increased, particularly from Japan. In many cases, imports
(including a widening range of equipment and components) are of
excellent quality. Imports are readily available at low prices and
on favorable credit terms.
Employment
In the first half of 1983 the rate of increase in payroll employment
in Michigan exceeded the national increase as auto firms recalled
workers. Data for Illinois, Indiana, and Wisconsin showed smaller
percentage increases than the nation, while Iowa showed no rise at
all. For the five states combined, payroll employment in the second
quarter was 10 percent below the level of 1979, while manufacturers'
employment was off 25 percent. Hiring intentions are somewhat
stronger than last year, but there is no near-term prospect of
significantly reducing the shortfall relative to 1979. Many
companies that reduced employment by one third to over one half have
no intention of rehiring significant numbers. Recruitment of new
graduates at colleges is down 10 percent from last year, and down 40
percent from two years ago. Help-wanted advertising in Chicago-area
papers was 10 percent above last year in the past two months, but it
was less than half of 1981 volume.
Consumer Purchases
Consumer buying has increased in the District in the first half of
1983, but not as much as in the nation--according to national
chains. Hot weather permitted large sales of summer merchandise with
less price discounting than last year. All types of appliances have
been selling well. Room air conditioners have been the star, with
shortages of some models. RVs are up 50 percent, and furniture up 30
percent from 1982. Sales of full-sized domestic cars and many
popular imports would have been even stronger if larger numbers had
been available. Despite favorable sales trends in most consumer
durables, physical volume is still well below the peak years of the
1970s. Retail inventories, overall,, are somewhat low relative to
sales based on historical comparisons. However, additional supplies
of most general merchandise are available within one or two days.
Blanket orders for general merchandise already negotiated indicate
that significant price increases will not occur this year.
Agriculture
Extremely hot, dry weather during the second half of July apparently
resulted in extensive damage to spring plantings in the Corn Belt.
Local analysts believe that damage through the end of July lowered
probable corn yields by a tenth from last year and soybean yields by
8 percent. Prospective yield declines, coupled with sharp cuts in
acreage under federal programs, may reduce corn and soybean harvests
by 36 and 20 percent, respectively.
Weather damage varies throughout the District, but it is most extensive in central and southern Illinois and Indiana and southern Iowa. Further damage is possible if the hot, dry conditions extend into mid-August as some weather forecasters predict.