Beige Book Report: San Francisco
January 14, 1976
In the opinion of our directors, the recovery is proceeding unevenly, with caution still the common attitude. Even though the strong burst of holiday consumer spending was in line with sales expectations, the pickup in new orders has been slow, especially for forest products and transportation equipment. A brighter pace of activity is reported in the food-processing, chemicals, steel, and petroleum industries. Agriculture is doing well, with lower feed costs reversing the profit picture for calf-cattle operators. Twelfth District banks have recently experienced good business loan demand in the fields of energy, utilities, agriculture, and consumer finance.
Retail sales rose to all-time highs in many areas over the holidays. Demand for new automobiles was exceptionally strong, and the market is expected to remain active. One large food chain reported that it ran short of inventory last month. Cautious inventory policy continues to hold sway, however, as retailers attempt to assess consumer sentiment.
On the industry level, inventories are reported to be back to normal rates except for wood pulp where a large overhang remains. Demand for forest products as a whole bottomed out in April-May 1975 and is now showing slow improvement as it responds to orders from the construction industry. Another area of concern is the manufacture of aircraft. A director from Boeing Co. reports that his company laid off some 8,000 people last year, despite the fact that it sold over half the share of market on commercial jets, 75 percent of which were sold overseas. A decline in new orders for commercial jets has prompted a significant cutback in plant and equipment expenditures for 1976. On the other hand, business is expanding at satisfactory rates in the food processing, chemicals, steel, and petroleum industries, although all express concern over rising costs. Demand for aluminum is increasing at a modest rate, and a director reports that aluminum shipments in 1976 are expected to be 30 percent higher than in 1975. The same director anticipates plant and equipment expansion of 25 percent this year. Copper demand, however, remains in the doldrums.
The construction industry appears to be looking forward to another slow year. In southern California, expenditures are expected to be off 5 to 10 percent from 1975. Although improvement in residential construction has been anticipated, there have as yet been no signs of a pickup. Costs of materials however, are steadily on the rise. In Orange County, California, the average home sale price increased to $55,950 by the end of 1975, up $5,120 from the first quarter of that year.
For agriculture, the 1976 outlook has improved because of cheaper feed. The cow-calf operators are on a break-even level. Some profit is being shown in feeder cattle, and feedlot operators have picked up a substantial part of their last two years' loss. There is great demand for farm land-development money which is used for clearing land, irrigation water, sprinkler systems, and operating expense.
Overall loan demand by business has held steady over the past two months, as increased cash flow lowered borrowing requirements or resort was made to the commercial paper market and because of cautious inventory policy. Consumer and mortgage loans are increasing in number and size. Special areas of recent strength in business loan demand would include energy, utility, agricultural and consumer finance industries, whereas general manufacturing and other industries, particularly transportation, have continued static or have shown recent weakness.
Concerning banking as an industry, a director from the West's largest bank predicts that 1976 will probably be the worst year from a profit standpoint since the depression. There is speculation as to just how many banks will have to cut dividends. Price-earnings ratios will stay down, making if difficult for banks to access the equity market. The slower growth pattern envisaged for the economy as a whole should help the industry in working out its problems. However, this director cautions against backing away from loans. He favors greater emphasis on determining the quality of the loan and pricing it according to its risk.