August 10, 1973
Economic activity in the Twelfth District continues to be led by heavy consumer spending on durables and automobiles. Strong demand is keeping most industries operating at full capacity, and agricultural prospects are excellent except in areas affected by drought. The only sign of weakness is in residential construction, and this weakness is beginning to affect timber production. Banks report strong loan demand, but no major liquidity problems at the moment.
Consumer spending is clearly the leading sector in all parts of the District, and to some degree this spending is thought to be in anticipation of more inflation. Accompanying this spending is a heavy demand for consumer credit at District banks. Declines in consumer durables purchases are expected by some directors later this year, and the heavy automobile sales of this year might cut into demand for the 1974 models. Fears of gasoline rationing may also hurt new car sales, according to one director. Our directors in agricultural areas report that farmers expect high prices and good crops this year, except in those areas of eastern Washington and Oregon affected by drought. High farm income is stimulating heavy purchases of new farm equipment, and deliveries from manufacturers are not keeping up with this demand. Crop prospects in California and fruit crops in western Oregon are excellent.
The major problem for agriculture is the continuation of the price freeze for beef. Beef producers are apparently reacting by withholding deliveries until the freeze ends. The result is a growing shortage of beef supplies on the retail level. Business investment expenditures are increasing both to purchase plant and equipment and to build up inventories. Environmental controls are cited as one factor in stimulating new equipment orders. High interest rates are not having a significant impact on this demand, and several banks reported that they are revising their lending guidelines in an effort to cut back. On the other hand, some directors report that business investment plans are being hampered by slow deliveries and capacity limitations.
Residential housing starts are reported to be lower in several areas—Oregon, Washington, and California—but apparently other kinds of construction are maintaining a good level of activity. A major manufacturer of builders' hardware reports order backlogs sufficient to keep at full capacity throughout the rest of 1973.
The weakness in housing starts, combined with reduced exports to Japan, has caused lower prices and reduced activity at Oregon and Washington timber mills. Pulp production remains high, but producers are described as reluctant to expand capacity because of uncertainty over profit-margin controls and the strength of demand over the next two or three years.
Increased supplies have apparently ended the gasoline shortages that had developed in some localities. Apart from some reduction in hours, dealers are able to operate normally. One director views the situation as having been "over-advertised". Nonetheless, the temporary shortages have been a factor in cutting tourism in the Pacific Northwest, but there has been no similar impact on tourism in California.
Drought in the Pacific Northwest is causing an energy problem in that region. Metallurgical industries, such as aluminum refineries, which are heavy users of electricity, are being forced to curtail production. Hydroelectric shortages may prevail in this region into the coming winter.
District bankers feel that the recent increases in interest rate ceilings for time accounts are of mixed value. Some think that the regulation changes have merely increased customers' confusion and perhaps have made them more aware of nonbank market instruments. Although problems may develop, none of the banking directors have reported major difficulties for their own institutions in holding time accounts, but several remained concerned about the longer term liquidity situation of banks. Savings and loan associations, in contrast to banks, are experiencing deposit losses despite the higher rates.