April 6, 1971
The general opinion of businessmen and bankers in the twelfth district is that the economy is beginning a period of gradual expansion. Some sectors are experiencing more noticeable rates of growth, especially compared to recent months-residential housing and wood products are examples-but other sectors continue to experience a slow rate of activity. There is no sign of a major increase in business capital expenditures. Overall, despite some areas of strength, the recovery is proceeding at only a moderate pace.
Residential housing construction is reported as having favorable prospects in most of the district. Idaho and Utah have a strong demand for single-family housing and also for apartments. Vacancy rates in cities like Boise and Salt Lake City are below one percent. In the Pacific Northwest housing starts are recovering and the demand for mortgages is increasing. The one big exception is Seattle, as would be expected, where the fall in aerospace employment continues to exert its depressing effects. In that market, apartment vacancies are in the 10-15 percent range. But for other parts of Washington and in the State of Oregon, residential construction is expected to be up by 1% to 6% over 1970, depending on the city.
A similar pattern of greater residential construction activity is found in California. The emphasis of builders is on low to medium- priced units, both houses and apartments. Higher priced houses are selling relatively slowly in most areas. Arizona is maintaining record rates of construction activity with continued low vacancy rates.
Because of the slow increase in housing demand in the past year and the consequent problems for builders, the amount of speculative building is relatively small in most states. Even with the recovery of demand, builders are tending to limit themselves to "pre-sales." The few speculative houses are usually model homes or the result of efforts of larger builders to keep their crews together. Part of this situation is a reluctance of builders to overextend themselves in view of difficulties they have had in the past, and part is due to difficulties in obtaining financing for speculative projects.
On the other hand, speculative builders have continued their activity in parts of Orange and Ventura counties in southern California and around San Jose in the north. These areas already have above-average vacancy rates and they have rising aerospace unemployment, so that an overbuilt situation may arise. One Director reported some concern that Arizona, which has attracted large national builders, may find itself facing an overbuilt situation later in the year. With these exceptions, the level of construction is being closely geared to demand.
Construction costs are expected by most Directors to rise as new wage contracts are negotiated. Even in areas with lower levels of construction activity, unions are expected to press for increases. The national pattern of wage increases, it is suggested, provides an example that tends to be followed regardless of local conditions, and quick settlements may be difficult to achieve locally. Expected annual increases in wage contracts range from 5 to 10 percent.
Retail sales are showing a mixed trend that is consistent, on balance, with a gradual rate of economic expansion. Sales in some areas are described as disappointing, and consumers' attitudes as cautious. One southern California banker reports auto dealers as expressing dissatisfaction over sales, but another banker in Oregon reports that auto dealers in his area are experiencing significantly higher sales. No major increases are reported in manufacturing that would suggest a strong general expansion.
One industry that is recovering is wood products and timber, but then that industry had undergone a serious decline in 1970. A large hardwood manufacturing company, benefiting from the expansion in housing production has decided to proceed with a new eastern plant, the construction of which had been postponed but other industries are still experiencing difficulties. One national food company, facing higher labor and other costs, is searching for ways of reducing numbers of employees; competitive conditions in the industry make it difficult to retrieve higher costs by raising prices. Other companies say they are maintaining cautious attitudes, especially where capital expenditures are concerned.
Bankers report little change in loan demand and most, but not all, have lowered interest rates on their time and savings deposits in line with national trends. Some individual banks have continued to offer consumer-type time certificates at their previous rate levels even though their local competitors have cut their rates. Arizona is one area where both banks and savings and loan associations have not cut rates on passbook savings accounts. A high local demand for funds has reduced the pressures to cut the rates paid depositors. In other states, most banks have cut deposit rates.