Beige Book Report: San Francisco
October 13, 1976
Our directors continue to report moderate economic growth but undertones of growing pessimism are discernible. The trend in consumer spending has been erratic resulting in uncertainty about the strength of holiday season sales. Demand for basic metals such as steel and aluminum has weakened more than could be ascribed to strike activity. The lumber and plywood industry is meeting expectations for a prosperous year, but there is a heavy overhang of pulp causing a lowering of sights for that industry. On the other hand, there has been a decided pickup in sales of commercial aircraft. Adverse weather and low water inventory in some areas have impeded crop production, but the more widespread condition is one of over-supply with selling prices, and consequently incomes, declining.
Retailers in the District have become apprehensive over the recent saw-toothed behavior of sales and are following a very cautious inventory policy. It is generally believed that consumers are in the process of adjusting their consumption patterns to more modest rates as opposed to the higher growth rates of 1975 which were caused by recession-related, pent-up demand. No unseasonable spurt in holiday spending is anticipated. Nondurable goods sales, especially, are expected to be flat, as indicated by a declining trend in new orders for apparel. Early data indicate that 1977 automobile models have been well-received, but the strike at Ford Motor Co. made analysis more difficult than usual. In agricultural areas, lower anticipated incomes are expected to result in lower retail sales of all consumer goods.
New orders for aircraft have exceeded expectations this year and manufacturers feel that the industry has turned a corner. Replacement demand f or commercial aircraft is expected to be heavy through 1981 leading one large producer to consider introducing a whole new family of jets. At Boeing, an order for 28 aircraft by United Airlines (largest aircraft order since 1968) has raised earlier forecasts of 1976 sales by 70 percent in dollar terms. The aerospace industry as a whole is leveling out and improvement is expected next year. Government defense bids are now out on 10 projects valued at $10 billion.
Demand for basic metals has slipped in recent months and is reflected in shorter lead time on procurements, special discounts and lower aluminum scrap prices. The rate of increase in the cost of purchased materials is slowing up and indicating greater availability of supplies. In contrast, the large overhang of copper inventory has been reduced and production is picking up. One director reports a definite lull in demand over the past two months for steel and aluminum products as well as chemical coatings, polyester and associated resin products that is not entirely related to the automobile and rubber workers' strikes.
Within the forest products industry, activity in lumber and plywood has been strong, meeting earlier expectations of a prosperous year, whereas, forecasts for the paper industry have had to be scaled down. "The pulp overhang in the world is the largest that it has ever been." Operating rates have been flat to declining from the pace of the first half of 1976 and no pickup is expected over the next few quarters.
News from the agricultural front is uniformly gloomy . Prices are low for both crops and cattle and one reporter states that, "This slump in agriculture could last for a year or two," because of over-production in a long list of commodities. The price of wheat declined by $1.00 a bushel over the past month. Potatoes are being ploughed under because the price has slipped to 90 cents per cwt. Farmers are finding this situation difficult to understand in the face of the recent European drought.
Machinery and equipment sales to agricultural areas are expected to decline. Spurts in capital investment are usually made in years of high income in order to take advantage of tax shelters in the form of fast depreciation as well as the investment tax credit.
Erratic rainfall and low water inventories have been disruptive to farmers all year. The content of sugar in the sugar beets is down because of the weather. Heavy rain hampered harvesting of beans, caused the third cutting of hay to be low in quality and destroyed approximately 50 percent of the California raisin crop. Water restriction (15 percent in the San Joaquin Valley) caused a great deal of crop diversion, such as from alfalfa to cotton. All agree that the situation will worsen considerably in 1977 unless there is adequate rain and a heavy snow pack this winter.