April 10, 1974
A distinct shift has occurred in the sentiments of our directors compared to recent months. Although there remains some uncertainty, more directors feel that business conditions will be stronger in the coming quarter than they had thought they would be. Continued weakness exists in residential construction and automobile sales, but business spending is very strong and consumer spending is holding up.
Most directors had expected a slowdown in economic activity in the first half of the year. The energy crisis was a major cause of concern; but now that the worst of the gasoline shortage appears to be over and business remains good overall, there is much more optimism. Several directors stated that 1974 will be much better than previously expected despite some shortages and dislocations. One director, after a recent trip around the country, reported most of his contacts have better business than they had anticipated. Other directors were "very optimistic;" they noted "strong growth" patterns and reported "there has been a significant improvement" in the last month.
The energy problem is turning out to be less severe than expected. The Pacific Northwest and Utah have surplus electric power, and gasoline is in greater supply although at higher prices. The greater availability of gasoline has been one element in the improved attitudes of consumers and businessmen. Automobile sales remain slow, but according to the reports by several directors, signs of a recovery are present. Sales of standard and luxury cars are reported to be improving, and used car prices have risen. In addition, the conversion of production to smaller-sized cars is having benefits for suppliers of automobile parts whose orders are heavier. A manufacturer of large power boats reports that sales are brisk. Fuel shortages had caused a noticeable decline in sales of smaller boats, but the market has rebounded.
Consumer retail spending is holding up, buoyed by heavy Federal income tax refunds and, in California, a one-time refund of taxes. Consumer borrowing has not declined significantly. Industrial activity also continues at a strong pace. Wood products, electronics, and industrial machinery manufacturers are at near-capacity levels of production. Lumber demand is much higher than expected. Shortages of metals and petrochemicals, however, are causing some problems for manufacturers. In both cases, the shortages reflect worldwide demand, and the situation is likely to persist for some time.
Capital spending by business has helped keep up activity in the construction industry. In most areas of the district, the decline in residential housing has been partially offset by heavy commercial activity. The building trades are not experiencing significant unemployment as a result of this shift in demand. Residential housing has stopped declining, but no major recovery is expected this year. In California, for example, the number of starts in early 1974 was running on a seasonally adjusted rate at about half of the 1973 levels. The sharpest declines both in California and in other District states has been in apartments. Some recovery in residential activity is expected later in the year, but it will still be below 1973 levels. There are some localities where residential construction is increasing. In the Seattle area where construction has had low rates for several years, excess stocks have been worked off, and demand for new housing is stronger. Some weakness is reported in office and professional building construction. Builders are concerned that the recent jump in mortgage rates and higher costs will cut down housing demand. Costs are expected to jump with the end of price controls and with new wage contracts.
The agricultural situation remains unchanged—excellent crops and high prices. Farmers are having some problems from shortages of equipment and fertilizer. While prices may be good, costs will be rising also, but generally farmers are optimistic about this year's income.
In banking, loan demand by both business and consumers is strong. A few banks have also experienced increased real estate loan demand, and savings institutions appear to have more funds available. Several banks think that the recent increases in interest rates will soon be reversed, although others are worried that longer-term rates such as mortgage rates will rise steadily to the point where demand for housing is reduced. Views are mixed about future interest rates. Some bankers think that rates will fall slowly over the rest of the year, but others think that an upturn in rates will come in the second half.