April 9, 1975
Our directors remain cautious about the near-term economic outlook and would prefer to react to developments as they occur. If anything, their estimate of the turnaround in general business activity has been shifted a little further into the fourth quarter of 1975. Consumer spending continues lethargic, and business loan demand is off considerably. The most depressed industries, forest products, construction and transportation equipment, have deteriorated further. Our directors do not believe that passage of the 1975 tax bill will create enough stimulus for a sudden recovery, although consumer spending will benefit.
Consumer spending is reported to be cautious; department store sales in southern California were down 5 percent from a year ago and promotional sales were ineffective. Furniture and appliance dealers are anticipating sales increases as a result of the tax rebates. Post-rebate automobile sales weakened across District states, but the decline was mitigated by price reductions stemming from cutbacks in standard equipment. According to one director, reports of improved mileage on 1976 models has all but sounded the death-knell for 1975 models. One banker reports a trend toward 42 to 48 month maturities on new car loans. Luxury cars continue to sell well, at about 15 percent over last year.
After a year during which manufacturers built up inventories in anticipation of price increases and materials shortages, the recessionary fall-off in demand has precipitated sharp inventory declines. It is generally believed that the worst is over, and output is currently in line with sales. Some industries, however, notably forest products and aluminum and food processing, are still working off excess inventories. Manufacturers are anticipating declines in materials prices, and they intend to hold down inventory in this hope at least until the fourth quarter of 1975.
The situation in the forest products industry continues to deteriorate. One large paper company has stopped shipments for 90 days and most other companies are still curtailing output. Negotiations for a new industry labor contract will get underway in May and strikes are anticipated. One director estimated that the final wage settlement will entail a 10 percent increase on a one-year contract.
The depressed state of the lumber industry continues unabated, reflecting weakness in construction. One director who cites the growing number of bankruptcies among building contractors and the high unemployment rates of laborers and architects, claims that it will take 7 to 8 years to absorb existing vacancies in southern California.
Petroleum inventories are currently at an all-time high and, although refinery runs have been reduced, stocks will be above normal through midsummer. Several directors indicated concern over the long-run petroleum supply situation—one citing that the fields in southern California have been nearly pumped dry and another stating that Washington D. C. has been short-sighted in its action on the depletion allowance. A study he has made showed that the worldwide effective tax rate for 10 large oil companies was 11.5 percent, compared with 8.4 percent for a sample of large commercial banks.
In a separate question inquiring as to the effects of the investment tax credit on their capital spending plans, the directors were unanimous in stating that there would be no impact. They consider that, with profits dropping and retained earnings for capital investment limited, long-term credit would have to be priced more attractively to induce capital expansion. One director states that a permanent investment tax credit at a higher level than 10 percent might have a significant effect.
The agricultural economy is still reflecting the effects of a highly profitable year in 1974: sales of tractors and farm equipment are up, but consumer resistance to high-priced processed foods is beginning to be felt at the retail level. A citrus freeze in the Bakersfield area will reduce yields by 30 percent this year.
This District's banks are currently experiencing healthy deposit inflows. Although the rate of return on loans is high, loan volume to business has been falling off, partially from lower demand and partially as a result of a policy change to improve the quality of loans made in the light of heavy loan losses last year. The banks anticipate only a modest resurgence in business loan demand by year-end, but they are actively seeking consumer loans. Mortgage loan expansion will be limited by the aggressive competition of S&Ls. This quarter will see a normal seasonal increase in agricultural loans. The increased liquidity of banks will be invested in securities only to the extent that it cannot be loaned.