August 13, 1975
Our directors believe that the recovery will be gradual, and they are viewing economic developments cautiously. Consumer demand is still sluggish, although automobile sales have picked up slightly. Manufacturing output is being maintained at recent levels, with increases in new orders still being satisfied through inventories. There is no indication of increasing job opportunities. All construction is being hampered by high costs. The grain sales to the USSR and light spring plantings are expected to result in increased food prices at the consumer level over the next six months. Business loan demand remains weak, and delinquencies are on an uptrend.
Consumers have not yet stepped up purchasing to a significant degree. Although department store sales are up about 7.5 percent over last year, this barely covers the inflation premium. Auto sales, however, have shown some spark over the past month, reflecting a pickup in consumer confidence. A large manufacturer of sportswear and apparel is optimistic about 1976 spring and summer lines, although sales currently are "flat". Tourist travel has exceeded expectations, with entrants to national and state parks exceeding last year.
On the whole, District manufacturing activity is steady at below-peak levels. New orders have picked up but are still largely being filled from inventories. Aircraft manufacturers in both southern California and the Pacific Northwest seem particularly discouraged about the pace of new orders, considering the long lead time before actual production is affected. The largest electronics firm in Oregon reports that orders recently have exceeded last year's volume by 10 percent, but company planning remains cautious. In the same state, machinery manufacturers anticipate declining inventories over the next six to nine months.
Demand for aluminum products has been increasing slowly. Inventories in the hands of users have declined sharply in recent months, although producers' stocks have remained high. Similarly, in the steel industry, orders have firmed but sales have come out of swollen stocks. The copper industry in Utah is benefiting from revived automotive demand.
The inventory adjustment appears to be completed in the forest products industry, but production will be directly tied to sales levels and the recovery is expected to be very gradual. Pulp and paper demand has increased slightly in the past month.
Natural gas supply shortages are becoming serious. A 10 percent decline in available gas for each of the next four or five years is anticipated. Utilities are unable to buy more gas, and new customers are not being sought. Customers with interruptible service may have to switch to propane fuel which is also in short supply.
Although real estate activity is buoyant, demand for new housing construction is generally very weak. The view is reiterated that: "We have almost priced ourselves out of single-family housing, with an average home costing $35,000 to $38,000."
It is an increasing problem to devise methods of amortization. New labor contracts have boosted construction worker wages 11 to 12 percent. Except for road building, nonresidential construction has not increased, and job opportunities have remained constant. In some cases, stretch-outs in environmental protection-control studies have delayed new plant construction, and the costs of pollution-related nonearning assets have amounted to 40 percent of construction outlays.
As a result of the Soviet purchase of large quantities of wheat, corn, and barley last month, prices of cereal crops have risen, in the case of wheat from approximately $2.95 a bushel to $4.00 net to the farmers. The inventory of fresh potatoes is near an all-time low, and the spring crop planted for summer harvest is below average. Although some farm costs have been going down (e.g., nitrogen fertilizers, which sold at $320 a ton in the spring, were recently quoted at $146 a ton), there will be strong pressures for food price increases over the next six months.
Bank loan demand has remained unchanged over the past month, with business loan demand the softest. In line with the increase in rates on certificates of deposit, other rates have been moved up to cover costs. Profit margins of the banking industry are expected to narrow as the year progresses, with more losses, delinquencies, bankruptcies, and more work out in commercial loans. Savings flows are down.