Beige Book Report: San Francisco
January 13, 1977
In the opinion of our Directors, the year ended on an upbeat as consumer spending met or exceeded expectations during December. Automobile sales were strong with imports accounting for an increasing share. There is still little buoyancy in capital spending plans and businessmen hope for some form of permanent tax incentive to stimulate growth in this area. Residential construction is very strong and savings inflows at savings and loan associations reached record levels in November and December. In response to the strength in housing, lumber demand has increased, but activity remains slow in the paper and pulp and steel industries. Orders for new commercial aircraft have risen and builders are expanding payrolls. The agricultural economy is quite depressed with prices for wheat, potatoes and sugar beets at very low levels.
Most areas of the District reported a year-end surge in retail sales activity that has prompted a cautiously optimistic view of consumer spending over the near-term. Automobile demand remained strong, especially for intermediates, but a trend towards a rising market share for imports was noted. Contrary to the over-all buoyancy, sales of ski equipment and apparel were down drastically and business was very slow in resort areas servicing winter sports. Moreover, sales gains were below average in agricultural areas where income gains this year were slight.
In response to a question which asked whether an investment tax credit or an accelerated depreciation schedule would stimulate capital spending in their industries, most Directors reported that either move would have a slight positive effect in activating marginal projects. For those industries with long lead-times for new construction and installations, the effect would be minimal unless made a permanent part of the tax structure. As one Director states, "Capital spending plans are generally dependent on demand outlook and expected rates of return based on projected prices," and another, "What is necessary to assure success is that ... (either) be enacted in an atmosphere that is perceived by business to offer it fair and reasonable expectation to prosper and profit." On the other hand, a television and radio station owner believes that tax relief would provide the incentive to purchase electronic news cameras, the cost of which, along with associated equipment, is $500,000 per station.
The residential housing market continues to strengthen each month, especially in California. Although there are real demand factors at work such as active resales and lowest vacancy rates on record, the market was supported somewhat last year by the January 1, 1977 deadline on land to be added to California's coastal zone. To the extent that the redefinition of the coastal zone "borrowed" some activity from 1977, some softness may be apparent in the early months of 1977. However, savings inflows to California savings and loan associations continued to set records in November and December assuring the means to support high levels of residential construction.
The lumber industry, fed by the strength in housing, has stepped up operating rates and is optimistic about 1977; logging operations have continued uninterrupted through the fall and early winter. But pulp and paper business continues weak including industrial products, such as cartons. Steel demand continues slow and no revival is expected until capital spending picks up. The steel price increases announced in late Fall have been offset by Special discounts. The main source of demand is automotive and there is a growing trend towards using more plastic and aluminum in building automobiles to reduce weight. The aircraft industry is picking up in the Pacific Northwest on the strength of both government and commercial demand. Boeing Co. expects to add 4,500 employees to its payroll this year.
Due to over-production, the agricultural economy is depressed on a broad front. The price of wheat is about one dollar a bushel compared with $2.40 a bushel a year ago; potatoes are now selling for $35 to $40 a ton while the cost of producing potatoes is roughly $50 a ton; sugar beets are selling at $22 a ton now while in 1974 the price was $45 a ton. There is, however, a strong export market for many commodities and for processed foods. Potato processors are working at 105 percent of capacity to satisfy Japanese and European demand. There continues to be over-production of dairy products and, in California where the listing of state-established minimum prices for fluid milk was ended, vigorous competition is anticipated.
Our Directors have expressed concern over high labor force participation and unemployment rates and would favor government-sponsored programs along the lines of the CCC. Unions are making attempts to "share the work", but, since this raises costs and results in plants being built elsewhere, they would prefer a solution outside the private economy.