Beige Book Report: San Francisco
May 14, 1975
Our directors indicate that there are still few tangible signs of economic recovery in this district. However, there is cautious optimism that the trough has been reached and a slow pickup in activity will occur over the next six months. Wary consumers are likely to save tax rebates. Petroleum inventories are at an all-time high and copper stockpiles are growing. New housing construction remains at a standstill while mortgage rates rise as a result of increased refinancing demand. In agriculture, crop prospects are generally good, but declining food prices and rising costs of fertilizer and machinery are likely to lower net farm income this year. The banking industry is still pursuing a selective loan policy.
Over the next six months our directors foresee only a modest pickup in consumer spending. Most anticipate that the tax rebate will be saved in some form. Toward the end of the six-month period, however, given a continuation of the decreasing inflation rate, the increase in disposable income should bolster consumer confidence and trigger a restoration of real consumer expenditures. According to a survey by one of the very large banks in this district, "about 30 percent of households have been forced by the recession to curtail their living standards. Another 15 percent have pulled back spending because of fear. The remainder have not been affected noticeably. The outlook is for the 'fearful' 15 percent to return to the market in the next few months—but the 30 percent will move back slowly over the year ahead."
Although aircraft demand has firmed in the Pacific Northwest, most industries continue to have problems of oversupply. Petroleum inventories are higher than at any time in history, and copper stockpiles are growing. The threat of a British Columbia work stoppage has caused a slight pickup in timber wood and newsprint production, but the underlying trend is still down. Japanese manufacturers have indicated that they foresee no change in their economy for the next six months and, consequently, they would not be stepping up their purchase of logs from the West Coast until year-end at least.
Demand for new housing remains very weak. One director cites the lack of historical balance between the current average income in the $13,000 range with the $36,000 average price of a newly constructed home. Mortgage rates are expected to firm at about 9 percent over the next six months in spite of large savings inflows because of federal deficit financing. One large California bank, however, reports that the recent surge in demand for mortgage funds at commercial banks has stemmed from refinancing needs, a negative reaction to the introduction of variable mortgage rates by some S&Ls, and a belief that future rates will increase to the extent that these factors are temporary, mortgage rates will not be pushed up significantly over the next six months.
Gross farm income receipts to growers and processors this year are expected to be only slightly lower than 1974 levels due to lower prices, but an anticipated increase of 10 to 12 percent in the costs of production, including fertilizer and machinery, will reduce net income receipts substantially. Weather conditions have been favorable for the most part and crop prospects are good. However, both domestic and foreign demand, especially for wheat, is off drastically. The price of wheat was $3.68 per bushel in Portland on May 1, 1975, compared with a record high of $6.35 per bushel on February 26, 1974. Cattle prices are still depressed, but at the retail level prices have increased, giving hope to the cattleman that higher prices will pass on down to him. Generally, the livestock industry anticipates that 1975 will be a readjustment period with market fluctuations due to short-term shortages and surpluses.
In banking, first-quarter figures were far ahead of last year; the cost of money is down and there is a favorable spread to loan rates. However, most banks are maintaining a selective posture on loans. Savings inflows continue strong and one bank has reduced interest on savings accounts by one-half percent.