June 14, 1972
According to reports received from our directors, economic conditions are following the same trends established in recent months. Output and employment are rising gradually, but not at rates rapid enough to bring about any major reduction in unemployment. Business investment plans are somewhat cautious, consumer spending is steady and construction is maintaining a high level of activity, yet there are some elements of weakness. In the housing sector there is some evidence of overbuilding of apartments in southern California. Since declines in dwelling-unit authorizations have occurred in recent months, homebuilding in California may also be slowing, and consequently later this year there may be a weakening in the demand for real estate loans and declines in mortgage rates. In other states, such as Utah and Idaho, commercial and residential construction are at record levels. Overall, the construction situation appears to be satisfactory and the areas of strength more than balance the few signs of weakness.
Construction activity has stimulated demand for lumber and wood products. The resulting greater output and employment has reinforced recovery, particularly in the Pacific Northwest. Expectations in the lumber industry are that demand will remain strong for the rest of the year.
Our directors were asked to comment on current wage and price trends. The consensus is both wages and prices have been growing at slower rates since the freeze was imposed last year. The directors do not foresee any major increases in either prices or wages, although there are a few complaints some wage increases allowed in the past were too liberal. Most firms and banks expect to stay within the guidelines without great hardship. In a few industries competitive pressures would prevent price increases in any event. In general the directors prefer to keep the guidelines system for the time being.
Other comments on the guidelines pointed to both problems and advantages. A problem for some firms is caused when unionized employees gain approval for wage increases above the general guidelines allowed for other employees not represented by unions. On the other hand, several directors thought the guidelines do play a useful part in negotiations of labor contracts by restraining wage demands. Another favorable factor has been the acceptance by several large unions of rollbacks from increases obtained in their previously negotiated settlements.
Directors representing banks report some improvement in the demand for commercial loans and further increases are expected. In consequence, somewhat higher interest rates are expected. One director thought the prime rate might climb 50 to 100 basis points later in the year and short-term money rates would lead the increase. At the same time, other directors thought mortgage rates would rise somewhat less than other rates, if they rise at all.
Demand deposits continue to rise. This reflects, according to some directors, a generally liquid corporate condition and a consumer preference for holding large demand deposit balances, as well as a greater level of economic activity. Saving deposits are also somewhat higher despite the 4 percent rate on passbook accounts paid by some banks.