Beige Book Report: San Francisco
April 14, 1976
In the opinion of our directors, business has been expanding at a moderate pace; and although the pace has not been labeled disappointing, it appears to be taking longer than usual for the pronounced strength in consumer spending to feed back into inventory demand. At some point, the business community might be convinced that the trend in consumer spending will be sustained and a rapid inventory build-up will take place. Price trends are being watched closely. Current evidence of lowered inflationary expectations is confined to agricultural products and some specific industries like pulp and paper where demand has remained weak. Wage package demands, however, are reported to be lower than last year. Plans for new plant and equipment spending that had been shelved during the recession are being dusted off but are being inhibited by environment protection studies and anxiety over price trends. Some bankers appear concerned over the continuing low level of business loan demand.
Evidence of lower inflationary expectations was reported by several directors, although the general consensus appears to be that wage and benefit packages will be up about 10 percent this year. The directors seem loath to give a long-term interpretation to current lower food price levels and lower quotes for such items as fertilizer, corrugated cartons, burlap, brass and titanium and are cautiously awaiting price reaction to an anticipated second-half swelling of demand. Those directors connected with natural gas production seem most convinced that inflation will recur as a very serious problem. More precisely, it is anticipated that price increases will continue at a modest rate for the next 3 to 4 months, but inflationary pressures during the latter half of 1976 will increase with food, energy and wages the major areas of concern. The inflation rate for the year is expected to be in the neighborhood of 6 percent, down significantly from 1975.
For the most part, industry in the far west appears to be marking time. New orders for commercial aircraft have been quiet although steady, and the overall pulp market is still soft. Activity in timber and wood products has picked up recently as wholesalers replenish low inventories in the light of increased residential housing activity. Other industries such as chemicals, steel and pleasure boat building report steady expansion. Nonferrous mineral activity, notably aluminum, remains depressed, but the value of coal output is up about 25 percent.
Some capital formation in the form of modernized equipment is being put in place, but sights are not currently being raised. Environmental impact studies have, in some cases, slowed the rate of new construction. A further inhibition to power plant construction is the fact that rate structures which provide the basis for securing funds in the marketplace must be approved by the public service commission. Many California projects appear to be on hold awaiting the results of the June Atomic Energy initiative. Public works construction is down from a year ago. One director from a large west coast bank, however, reports that there are early signs of renewed general interest in plant and equipment spending that will become supportive of the recovery late this year and in 1977.
Cash receipts from farming in 1975 just about equaled 1974 in spite of a lower price for wheat. So far in 1976, irrigation has been sufficient to counter low rainfall, but farmers would suffer if next year's rainfall were below normal. Many items used in farming have declined drastically in price over the last year; fertilizer and insecticide prices have fallen as much as 25 to 30 percent and costs of corrugated cartons and burlap sacks have declined for the past two packing seasons. Prices of farm machinery, however, continue to escalate. The agriculture industry does not anticipate heavy spending for expansion this year.
Business borrowing at commercial banks has been lethargic as a result of abundant corporate liquidity and the prevailing cost differential between bank loans and commercial paper issues. Consumer loan and real estate demand have been very strong, bolstering the notion that the consumer is leading the way out of the recession.