December 12, 1973
The mood of our directors has become much more uncertain about the future course of the economy because of the energy crisis that may, in the view of some directors, cause a recession in 1974. At present, consumer demand, with some exceptions, and private capital expenditures are still high. Residential construction continues to fall off and layoffs are occurring in some industries. Banks report little change in financial conditions.
The energy crisis is a major concern of our directors. Because of uncertainty about its seriousness, most are not able to forecast the impact on general economic activity, but continued expansion is expected. The pessimistic view is that a serious recession is possible along with more inflation. On the other hand, continuing strong consumer demand and private capital expenditures are thought by many to insure a lower, though still acceptable, rate of expansion next year. Export activity is another important source of demand, but there is some sign of a reduction in Japanese purchases, and the fuel crisis may also have an adverse effect on foreign demand.
Consumer spending for most nondurables and services is still high in most District states, but there are reports that purchases of durables are lower. Reports from merchants indicate excellent Christmas sales are likely. Sales of automobiles, especially the larger models, are much lower. Dealers are cutting their sales forces and several automobile assembly plants have been closed in California.
Energy shortages are causing problems particularly for the lumber industry and plastic manufacturers. Plywood mills in the Pacific Northwest have, or are likely, to cut production because of a shortage of natural gas for drying and glues for bonding wood. Diesel fuel appears to be in short supply in most areas. In southern California, one director reported that a black market is developing for this fuel. The gasoline shortage, although not severe as yet, is causing problems for tourism throughout the District and for products such as recreational vehicles and pleasure boat manufacturers.
On the other hand, heavy rains in November have relieved much of the hydroelectric power shortage in the Pacific Northwest, and public utilities now expect to meet existing levels of demand this winter. The only area in this District where an electricity shortage appears likely is in southern California.
Agricultural prospects remain good, farm receipts are forecast to be up to 40 percent higher in Oregon, and similar optimism prevails in other District states. The energy crisis may affect agriculture primarily through shortages of diesel fuel and nitrogen fertilizers. Some food processors may also experience difficulties where they are dependent upon interruptible supplies of power.
Residential construction continues to decline, especially multiple units. However, this decline is offset in many areas of California and the Pacific Northwest by strength in commercial activity. A large manufacturer of building hardware thinks that the energy shortage on top of the high cost of money and material shortages will hurt construction more than recent industry forecasts indicate.
Investment prospects, according to our directors, remain strong. Backlogs of orders encourage efforts to expand and capital appropriations remain high, while inventory holdings are judged to be below desired levels. One large bank optimistically forecasts that the need to expand capacity and restock inventories will dominate problems arising from energy shortages.
Bankers report little change in monetary conditions. Deposits continue to grow and there is now little disintermediation. Business loan demand has weakened at some banks, but in general it remains strong. Demand for term loans to be used for capital investment has increased at some California banks, demand for residential mortgages has increased despite the fall in construction, and some banks are increasing their mortgage lending to build up their portfolio at current high rates. Consumer borrowing has slowed from the pace achieved earlier this year.