February 7, 1973
Economic activity is maintaining a steady rate of growth in the Twelfth District. Consumer spending is strong, and construction expenditures are still high even though a decline is expected later in the year. Phase III of the Economic Stabilization Program is generally well accepted, despite some uncertainty as to its effectiveness. The consensus of our directors is that controls of some kind are needed for 1973.
After a record level of retail purchases in the last quarter of 1972, consumer spending is somewhat lower but still quite strong. Retailers throughout the District are optimistic about 1973 prospects, although profit margins are not satisfactory on some lines of business. One director thinks that sales of automobiles and other consumer durables will be weaker later in the year. However, the large amounts of tax refunds expected in the first quarter are favorable factors in maintaining consumer expenditures.
Construction activity is still at a high level but it is expected to turn down later this year. A major manufacturer of builders' hardware reports that sales currently are high, and no downturn is apparent in orders as yet. A favorable factor for housing demand is the continued inflow of funds to savings and loan associations which has kept mortgage rates stable. On the other hand, the reduction in Federal housing subsidies is expected to curtail residential construction. One large bank foresees a 20 percent reduction in housing starts in California.
Many agricultural prices are expected to remain near present levels, but cattle prices may be even higher. On the other hand, several directors think that wheat prices may be lower because of the increased acreage of the coming crop; one director suggested the wheat crop might be 20 to 30 percent larger this year because of the relaxation of acreage allotments and this could lead to a large wheat surplus. Similarly, increased production of potatoes is expected to result in lower potato prices.
The rate of economic expansion is highest in Idaho and the Pacific Northwest which are states benefiting from the strong demand for timber and agricultural products. The greater production at the Boeing Company also is helping the Washington economy. In California, one bank forecasts that the growth rate in that state will be satisfactory, but it will be below the national trend. Reduced Government employment and an expected mid-year slowing in construction and certain classes of durable expenditures are reasons for this forecast. The San Francisco Bay area in particular is likely to experience a slower growth rate. Our directors accept the need for continued controls, but there is considerable variation in their assessments of the impact of Phase III. Some welcome the loosening in controls from those of Phase II, especially since continuation of the previous constraints would have caused increased distortions and inequities. Some think that the new controls cause too much uncertainty by their vagueness or that they will not be very effective. Most of the concern centers on the impact on wage settlements during the coming year. The consensus seems to be that, even though Phase III is less restrictive, controls do help in restraining wages.
The forest products industry seems to be particularly sensitive to the new controls. The industry price structure is already distorted by imports and strong demand. In this industry, the behavior of the small time producers, who are not controlled, probably will determine now how prices will rise. There may be problems, but prices are expected to level off after an initial surge. Phase III may also permit higher wage settlements since forest products unions are likely to press for wage increases above the 5.5 percent guidelines. On balance, Phase III is described as creating a better atmosphere for investment in the industry.
Interest rates, with the probably exception of mortgages, are expected to rise. Long-term rates are being held down by various non-market factors, but short-term rates are likely to rise more than was expected earlier. An increase in the present 4 percent rate on passbook savings is a possibility. Demand for business loans and consumer credit us high in most areas.