Beige Book Report: San Francisco
March 12, 1975
Our directors are looking to government for a restoration of confidence in the economy and an indication of the long-run direction that the economy will take. The hardest hit industries in the current recession continue to be construction, lumber, and transportation equipment. However, the directors connected with these industries are now expressing the belief that the situation has stabilized, but they foresee little change in employment over the next six months. In the absence of a very basic surge in demand, however, the outlook is for a rise in the overall unemployment rate, as new entrants into the labor force are not likely to be absorbed. Many anticipate beneficial results for their own businesses if the declining rate of inflation persists.
In manufacturing, the picture remains mixed, with energy- and petroleum-related companies operating at high levels, while construction materials and consumer goods producers are experiencing a decided but decelerating decline in demand. On the positive side, several directors mentioned the intensity of petroleum exploration activity in their areas. A director in charge of a broadcasting network reports that advertising expenditures are higher than a year ago, and another director states that demand for mobile homes is still good.
In many instances, such as lumber, residential housing, and transportation equipment, activity appears to have stabilized, but at very low levels. Commercial aircraft orders are not expected to rise substantially until a strong economic recovery is under way. The Boeing Company's optimistic forecast of February, when early 1975 sales exceeded expectations, was based for the most part on foreign orders, and this source of strength has since waned. The company is now making lower projections on the basis of weaker domestic demand. Automobile sales, after being stimulated by the producer rebates, have again met with consumer resistance, while in the area of nonresidential construction, intensified competition is evident in a sharp rise in the number of bids per project.
Agriculture, which has been one of the mainstays of the Western economy, remains strong, but is beginning to develop some weaknesses. The potato crop, for which contracts were available at $75 per ton in the spring of 1974, is now selling in the open market at $20 per ton. On the positive side, one director reports that, although California dairy farmers have been in a loss position for the past three months due to high grain and low beef prices, improvement may now result from falling feed prices. Reduced consumption of dairy products, which this director claims is recession induced, however, continues to affect the industry adversely.
In response to a specific question regarding business loan expectations over the next six months, our banking directors leaned on the side of optimism. However, this is not attributable to a belief that this six-month period will witness a sharp upswing in loan applications, but rather that such an upswing might occur toward the end of the year. Currently, retailers are working off inventory, and loan demand is practically nil. At the same time, one director states: "We are starting to see some home building in small tracts, and borrowing by small timber operators for log inventory and some commercial construction ... is active among the smaller custom manufacturing shops." The larger corporations appear to be getting their liquidity positions in order and conceivably might unshelve some expansion project as soon as the outlook is propitious.
In response to a related question, which asked whether the volume of loan demand was dependent on interest rates, the replies mostly were negative. However, one response commented that "business credit demands are sensitive to the behavior of interest rates, but when rates are falling there is a general tendency to postpone borrowing to await still lower rates. When rates begin to turn up, it can be expected that loan demand will pick up as well."