Beige Book Report: San Francisco
January 15, 1975
The effects of the economy's slowdown are being felt strongly in this District. Residential construction continues to be stagnant and, with it, forest products. Industrial production is falling in most states, and more cancellations of capital projects are reported. Consumer spending in December was up in dollar terms, but in most areas retailers had been holding sales to reduce inventories. Agriculture, with the exception of cattle and dairy products, remains strong. Our directors show considerable variation in their views on economic prospects for 1975.
Residential construction through most of the District remains weak. In southern California, coastal developments have been stopped for environmental reasons and developers are taking losses. Lack of housing activity has contributed to falling production of lumber and plywood and increasing layoffs. One director associated with the timber industry describes the situation as very bad, with the bottom yet to come. A further problem for this industry has been the recent fall in exports, particularly to Japan.
Even the pulp and kraft industry, which until recently has been operating near capacity for two years, has been experiencing reduced orders. In the last six months, one firm reported that volume dropped about 25 percent. Because paper containers are ordered to meet current production—containers are not stored—a drop in orders is a fair indication of current trends in the industry.
Consumer spending was described as restrained in December. Sales in dollars were up approximately 10 percent on the average. Much of this performance was accomplished through vigorous sales efforts by retailers to draw down excessive inventories. Retailers appear to be entering 1975 with great emphasis on inventory control. Sales of durables are described as good in some areas and poor in others. Consumer purchases of automobiles are weak, an exception being luxury cars, and are reported to be down approximately 20 percent over the same year period a year ago.
Most agricultural areas in the Twelfth District are prospering. Encouraged by the high prices obtained in 1974 and with good prospects for 1975, farmers are maintaining investment plans, although they are becoming more cautious in view of the slowing national economy. Weaknesses are apparent in cattle and, to some extent, poultry. California milk producers are facing problems in trying to maintain existing price levels in the face of declining consumption. In Idaho and eastern Washington, inventories of processed and frozen potatoes are rising because of falling orders. Fresh fruit, vegetables, and grain are in good condition, although there is concern reported by several directors about the possibility of grain export controls being imposed in order to drive down prices.
In industry, shortages in some basic products—steel and copper—have disappeared. Companies report increasing numbers of order cancellations and layoffs are becoming more widespread. Postponement of investment plans and stretching of current projects are more common. The aerospace industry companies in California are gradually laying off personnel due to cutbacks in military and commercial orders, and these reductions are not expected to be reversed soon. Unemployment in southern California is above the national average, with the exception of San Diego which has escaped large layoffs. Utah is one state where industrial expansion is continuing with high levels of copper production and increasing coal production.
Banks are continuing efforts to control lending with varying success. A large Utah bank reports that a careful handling of loan demand has reduced its loan-deposit ratio from 80 percent at midyear to 72 percent, but a large California bank had much less success in achieving a planned reduction in lending because of a lack of alternative sources of finance for its customers. Consumer credit is described by one banker as sluggish, and other banks are also concerned about signs of increasing consumer delinquencies, even though actual losses are low.
Considerable variation exists in the views of our directors about the prospects for 1975. The president of one large California bank thinks that the financial environment in 1975 will be tougher than 1974, and this situation will apply to the other sectors as well. In contrast, another director, president of a large manufacturing company, thinks that the present recession will not be protracted. Similarly, views on inflation are divided, with several directors feeling that the elimination of shortages will reduce the rate of inflation to a 6 percent annual rate by the end of 1975. On the other hand, the directors of our Los Angeles branch agreed that inflation is still the number one problem.