Beige Book Report: San Francisco
December 8, 1971
Economic conditions in the Twelfth District are basically unchanged. Residential construction continues to be strong and consumer spending is steady. On the other hand, there is no evidence of any upswing in current business capital spending. In our directors' comments on Phase II, the most common reaction was one of uncertainty about the details of the controls and their immediate consequences, hut some optimism was expressed about the impact of Phase II on the 1972 economy.
Residential construction is maintaining its pace throughout the District, and demand seems high for existing as well as new houses. Mortgage finance is readily available and mortgage rates are somewhat lower. There is also somewhat greater strength in commercial construction in some (but not all) areas of the District.
This activity in construction has benefited other industries; in particular, the lumber and wood products industry. Production of lumber and related products has helped increase employment in the Pacific Northwest. Similarly, a major producer of builders' hardware reports operations are at capacity in existing plants; he plans the opening of a new plant in early 1972 to meet strong demand.
Consumer spending is continuing at a satisfactory rate in most areas, although consumers are still showing some signs of cautiousness. Consumers are increasing their purchases of durables, and some directors interpret this as a sign of improving consumer confidence. Retailers are looking forward to heavier purchases during the Christmas season. Despite the high level of auto sales, dealers are not confident that the current rate will be sustained and some are expecting a slowing of sales in the next few months.
Business investment intentions have not been revised upwards. Current projects are being carried through, but there does not seem to be any strong incentive to increase investment plans: Inventories are described by some of our directors as being deliberately kept low and geared to sales, as part of a continued cost-reduction effort. Some manufacturers, such as those supplying the construction industry, are doing well, but others report sales below expected levels. For example, a major oil company reports gasoline sales falling below trend, and jet fuel sales reduced because of lagging airline demand.
District banks have been gaining deposits. But, with few exceptions, bankers describe business loan demand as weak, reflecting the moderate pace of business spending. Banks, which have attempted to expand business loans, report that they have had to accept somewhat greater risks. Real estate demand (as already noted) has been strong, and consumer installment lending has risen. Some banks have increased their efforts to expand their installment loans. Interest rates in general have trended downward.
The general reaction of our directors to Phase II is one of uncertainty. In particular, there is uncertainty about the details of the price- and wage-setting procedures and, consequently, there is unwillingness to make major decisions at this time. About the long-run consequences, there was no consensus. Some directors felt that the decisions of the pay and price agencies would lag behind market changes and others feared that wage increases would not be dampened by the Pay Board. Many were unwilling to estimate what the consequences of the controls would he, but other directors thought that the controls would produce expectations of less inflation and that this would have favorable effects on economic activity next year. Overall, Phase II was greeted with less enthusiasm than Phase I, because its duration and character are more difficult to assess.