May 10, 1977
Consumer spending continues strong all over the Twelfth District, with an emphasis upon autos and big ticket items. The inventory picture is mixed, with aluminum and small cars moving downward and aerospace and forest products moving upward. Construction activity continues brisk and rainfall improves the outlook for agricultural production. Commercial lending moves up slightly in April and purchases of large CD's continue downward. The general consensus in the district is that the President's energy policy increases uncertainty and will lead to a slowdown in plant and equipment expenditures in 1977.
Consumer spending is reported strong in almost all urban areas of the Twelfth District, while low farm prices and drought have generated a weakness in rural consumer demand. The composition of consumer demand tends to favor autos and appliances. A good portion of spending appears to be associated with the construction boom; furniture, appliances and other household goods are receiving considerable consumer attention. Some sporting goods stores are also claiming a dramatic rise in sales. One item reported to be facing slower sales is coffee. A supermarket price war continues in Los Angeles.
Auto sales are currently above 1st quarter levels in most areas. For example, one foreign car distributor in Oregon reported the following pattern of sales: Jan. 1,110; Feb. 1,002; Mar. 1,450; Apr. 2,137. Foreign auto sales account for 33 percent of total in Oregon. Composition of district auto sales is generally reported to be steady (with percent shares of 35 compact, 34 intermediate, and 30 large). However, subsequent to the President's energy message some areas report a shift to large cars and other areas a shift to small cars.
Business inventory movement is mixed. For example, inventories of small cars have fallen to very low levels for some makes, while newsprint inventories have grown quite large due to a softening in Japanese demand. In fact, decreased Japanese demand has led to a buildup of inventories in a number of West Coast forest product lines. One large aerospace firm (Boeing) reports an increase in inventories in anticipation of an expansion in sales. Aluminum inventories continue downward and one producer expects an aluminum shortage next year.
The spotlight in western production continues to fall on the housing sector. Construction activity appears brisk all over the district. Southern California reports first quarter building permits up by 50 percent over the year earlier figure (with a 60-40 percent, singe-multiple composition) and housing values up by 68 percent over a year ago.
The construction boom has helped to keep the forest products sector active, and demand for cardboard containers is also reported up. Aluminum production is currently higher than the first quarter level and aerospace activity continues at the same high first quarter rate. Some manufacturing volume is reported down from the first quarter levels. While the drought continues to adversely affect the agricultural sector, rainfall has brightened the outlook of one and two months ago. For example, the Yakima Valley in Washington will now get 30 percent of its normal irrigation deliveries rather than the 6 percent of normal previously announced. In Oregon, all parts of the agricultural sector are reported improved, with the exception of livestock where water shortages, poor pasture and record-high hay prices are very seriously hurting a number of producers. Agricultural employment is down all over the district.
While consumer lending still continues strong, business loan demand is flat in some areas and up slightly in others. Two large California banks, plus one Oregon bank report that commercial lending in April was slightly above the first quarter level. An Idaho banker reports loan demand is ample in volume but down in quality due to low crop prices, water shortages and confusion over the new energy policy. Real estate lending is strong in a number of areas and two Washington bankers have expressed concern about the strength of demand for and size of these loans. In particular, they see an increasing number of real estate loans based upon both husband and wife incomes and they are uneasy about making these loans but feel obliged to do so by sex discrimination laws. A quantitative picture of lending is given by one large California bank: since year-end, consumer installment lending is up 8 percent, real estate up 6 percent and commercial up 1.6 percent.
There is a general consensus that the President's energy policy increases uncertainty and will cause a general slowdown in plant and equipment spending until the actual shape of the energy program and its effect upon various energy prices becomes clear. One Oregon banker feels that all major industrial plant and equipment expenditures will be reviewed in light of the new energy policy's effect on construction costs, direct energy costs, conversion-to-coal costs and rebates and investment tax credits. But, like most of our directors, he feels that these effects will not be clear until it is known how much of the program remains intact after its journey through Congress. The president of a major forest products firm claims that since 1973 energy use per unit of output has already been reduced by 10 percent in his industry and he foresees both the further use of waste material for the internal generation of energy and the construction of new plants using coal as the primary purchased fuel. However, a gas company president feels a shift to coal will be possible only through a relaxation of California's air quality standards and the introduction of a cleaner coal burning technology. And one aluminum producer feels that forcing companies to switch to coal will drive some offshore, including one of his own plants. The increased uncertainty generated by the proposed energy program has caused one large California bank to lower its forecast of 1977 state plant and equipment spending by one percentage point—from 13 to 12 percent over last year.