February 7, 1973
A check of a number of Tenth District firms involved in the energy field elicited mixed responses regarding their capital expenditure plans. Petroleum refiners report no plans for increasing on-line capacity either in the immediate or near-term future. At the same time, electric power companies in the District will be adding considerable generating capacity as a result of completion of large capital projects begun some time ago, with further expansion planned over the next 3-5 years. Elsewhere, investment plans suggest optimism over the near-term outlook. For District farmers and ranchers, 1972 was their most prosperous year ever, and, while the first half of 1973 appears very strong for agricultural income prospects, sharply higher production costs will likely temper these gains somewhat. A reflection of strength in the farm sector was evident in loan demands at District banks in January. Demand was strong in most categories with increases reported in loans to farmers and particularly in business loans. Most bankers felt that the vigor of the current economic expansion, rather than the rise in interest rates from competing lenders, was the primary explanation for strength in loans. However, increases in competing interest rates were cited by some bankers as the cause of some minor time and savings deposit runoffs.
The hard winter's drainage of fuel supplies prompted inquiries regarding the capital expenditure plans of major oil producers and power companies. Tenth District petroleum refiners report no plans to increase plant capacity during 1973, nor any projects underway that will increase on-line capacity in the near future. Several refiners say that, while inadequate capacity is a major problem, it is directly related to the
lack of an assured crude oil supply. One of the refiners hopes to start construction on a new refinery within 3 to 5 years, but its location will depend entirely upon the availability of crude oil. Although refiners are not expanding, they are spending considerable amounts for pollution control and equipment replacement. Refiners explain part of the recent shortage of heating oils and gasses as being a consequence of price
ceilings which discouraged production of these hydrocarbons in favor of gasoline. Increasing incidents of fuel oil shortages are appearing in the District as cold weather continues.
Despite shortages of petroleum fuels, electric power companies in the Tenth District continue to plan new facilities that will use natural gas as the primary fuel. Only one nuclear plant is being built in the District. Pollution abatement requirements have forced one power company to retire a coal-fueled plant. Capital projects to be finished this year will add between 25 and 50 percent to generating capacity, and continued expansion is planned over the next 3-5 years.
Judging from a check on the investment plans of other kinds of businesses in the District, increases over last year would seem to be the rule. The airlines are riding the business cycle, as are the aircraft producers. Some of the airlines are buying more planes than they ordered, thanks to a gamble to build speculatively by Boeing and others. Construction activity is expected to remain steady this year overall. These prospects are apparently good enough to encourage related businesses, such as suppliers of structural materials, to make capital outlays for expansion and cost reduction. Even where profits are severely constrained by competition, such as for a major metal mining-refining outfit operating here, the outlook is evidently sufficiently optimistic to stimulate expenditures for expansion and replacement.
Recent farm income estimates indicate that District farmers and ranchers enjoyed their most prosperous year ever in 1972. Buoyed by sharply higher crop and livestock prices, District cash receipts from farm marketings grew to $10.8 billion, a 14 percent gain over 1971. Heavily oriented toward the cattle industry, which experienced continued growth and stronger prices last year, District cash receipts outpaced the 10 percent growth rate for the nation as a whole.
In the coming months, the prospects for District farm income remain especially strong. On January 1, the number of cattle on feed was 5 percent above a year ago, and with prices averaging about $8 per hundredweight higher than January 1972, a significant boost in District income can be expected. Actually, the bright outlook for farm income encompasses nearly all sectors. Following the 5 percent spurt in December, for example, farm prices rose another 5 percent in January to a new record high. However, while this development will help to underpin the income prospects over the first half year, sharply higher production costs during the same period will temper the income gains in the District to some extent.
Loan demands were strong in most categories at District banks in January with increases reported in loans to farmers and particularly business loans. When asked whether the strength in business loans could be partly due to the rise in commercial paper rates, most bankers responded in the negative. District bankers pointed out that only their largest customers have ready access to alternative sources of short-term funds, such as the commercial paper market. One banker noted that even though the data appeared to suggest that bank borrowing became more advantageous during January relative to use of commercial paper, this impression might be misleading. His bank, for example, had effectively increased the prime rate to 6-1/4 percent without public announcement, the official prime rate at that bank remaining at 6 percent. Most bankers related the strength in loan demand by farmers and businesses to the vigor of the current economic expansion.
Tenth District bankers are beginning to report time and savings deposit runoffs due to the increases in competing interest rates. So far the drops have been minor, and are not expected to become a serious problem unless interest rates rise substantially further.