August 9, 1972
Our directors report that the regional economy is expanding rapidly and is generating a strong demand for bank loans. They also note several signs of weakness, such as the topping off of the construction boom and the tendency for many firms to restock inventories only on a replacement basis. Generally speaking, however, they agree that the strong pace of forward planning by business firms reflects both the favorable tone of the recovery to date and a rising level of confidence in the overall economy. All areas of the District report a continued high level of construction activity, but all express fears about the continuation of the housing boom, especially the apartment-building boom. Firms tied to the construction industry have encountered a noticeable decline in new orders over the past several months; one such firm, in builders' hardware, expects to reduce production and employment as its order backlog decreases.
Most forest-product facilities in the Pacific Northwest continue to operate at or near capacity. Although some producers foresee a falling-off in demand from the residential construction sector, they also expect overall demand to remain high because of the strength of the nonresidential sector.
Prospects for other manufacturing, meanwhile, continue to look favorable: Southern California, for example, expects at least a mild employment boost from the award of the space-shuttle contract. Alaska, on the other hand, continues to suffer from high unemployment because of the premature arrival of hopeful oil- pipeline workers.
Retail sales of consumer goods (especially autos) expanded rapidly in recent weeks—except for the Los Angeles area, where a record-breaking heat wave cut into retail sales during July. Retail sales remained high in the Pacific Northwest, even in the face of the Puget Sound area's continuing unemployment problem.
Most farming areas of the District are in a reasonably profitable condition despite drought conditions in the Southwest and last spring's freeze damage to fruit crops in the Mountain States. (In Utah, practically all fruit canning factories are now closed because of the loss of the fruit crop.) The Northwest in particular has better-than-average prospects, with steady-to-rising prices expected for wheat, potatoes, and cattle.
Almost all areas report strengthening demand for business loans, although some firms do not need to resort to the banks because of their strong liquidity position derived from internal cash flow or external bond financing. As for the banks, their currently available funds and the expected inflow of savings seem sufficient to accommodate a strong loan demand throughout the rest of the year. Loan-deposit ratios have been rising, however, originally because of consumer loan and mortgage demand, and more recently because of business loan demand.
During the remainder of the year, bankers expect that business firms will borrow increasing amounts for handling receivables, for expanding inventories throughout the manufacturing-distribution chain, and for activating plant equipment expansion plans that had been laid aside during the recession. Some large firms say that they have not borrowed short-term and that they do not intend to do so for the remainder of the year, but these firms, by and large, are exceptions to the general trend.
In the Northwest, encouraging crop prospects have led farmers to borrow for equipment replacement and expansion. In the Mountain States, a strong business expansion has created credit demands for financing motels, manufacturing plants, shopping centers, and resort-type homes. In Southern California, further business-loan expansion is expected because of inventory investment and the rapid growth of capital spending. Most bankers expect that prime-rate increases will go along with this increase in loan activity, but they doubt that rate increases will dampen the underlying buoyant demand for credit.