Beige Book Report: San Francisco
August 11, 1976
Our directors report a continued gradual improvement in business, with price pressure moderate compared with recent experience. Newly negotiated wage packages are averaging gains of approximately 10 percent, but industries in their second or third year of contract life are averaging less. Although some commodity prices—such as aluminum scrap and natural gas—have risen quite sharply, most are showing a decelerated rate of increase, and some (residual fuels and nitrogen fertilizer) have actually declined. Construction of single-family residences has picked up, but multidwelling building remains sluggish, due to the gap between prevailing rent structures and building costs.
The annual wage bill increase in 1976 for newly negotiated contracts is averaging about 10 percent. In many cases this represents a considerable scaling-down of the unions' original demands. For industries in their second or third year of a contract, gains have been far less. One director reports that "increases are continuing, but on the whole seem fairly moderate by standards of the recent past".
Materials prices appear to be strengthening but, except in isolated cases, increases have not been dramatic. Since the recovery began in September of last year, a large manufacturer reports that scrap aluminum prices have risen from 14 cents per pound to 30 cents per pound; basic costs of pig aluminum and sheet increased an average of 15 percent, the same as the raw materials costs for basic resins (polyester, epoxies, etc.); and steel products are also up about 15 percent over the same time frame. Paper products sold to the dairy industry have increased 6 to 7 percent in price since the first of the year. Motor gasoline has increased about 15 percent during 1976; residual fuels are down 20 to 25 percent, and the price of the remaining components of a barrel of crude are about the same as in January. Current quotes for nitrogen fertilizer average around $130 a ton, down from a 1975 cost range of $210 to $230 a ton. Lumber costs are up about 10 percent, and copper, which is still being sold from stockpiles, is starting to increase. Energy costs, especially for natural gas, continue to rise more rapidly than other costs.
Interest in plant expansion is still minimal, although the president of a large manufacturing firm in California commented that, "with production of steel approaching 90 percent of 'optimum' capacity, we expect a continued, steady—though slower than mid-1974—increase in capital spending".
New housing construction in the Twelfth District is concentrated in single-family units, and the market is strengthening. Nevertheless, a producer of aluminum siding reports that a 70 percent proportion of its recent surge in sales was for existing home improvement rather than for new construction. There continues to be a very strong resale market for single-family dwellings based on profit taking and upgrading.
Over the first half of 1976, there has been only slight improvement in apartment construction, and the main reason cited is the disparity between current rent scales and construction costs (craft wages). One bank in Oregon calculates that rental fees of 29 to 32 cents per square foot are needed to finance new construction, whereas current rentals are said to support only a 23 to 25 cents per square foot level.
In southern California, vacancy rates are down and rents are reported to have increased sufficiently to have sparked some interest in apartment construction, but the market tone remains sluggish. On the other hand, a strengthening trend toward building more duplexes and "fourplexes" has been noted. One reporter comments that passage of the tax reform bill with the Kennedy-Haskell amendment would eliminate multiple-dwelling investment as a tax shelter and further reduce construction levels.
Many farmers and ranchers are experiencing a very trying 1976. The farmers who sold crops immediately after harvesting have made a profit, but those who placed their crops in storage have been facing a continually declining schedule of prices and, in many cases, will have to sell at a loss.
The optimism about higher cattle prices is beginning to diminish. Because of heavy losses taken this year on fattened cattle, the prospect is for a poor feeder cattle market this fall.