October 21, 1975
Our directors view the recovery as slower than anticipated. Business investment plans are cautious and inventories continue to be held down to levels matching orders. Residential construction activity shows mixed trends in this district but on balance is recovering despite some problems associated with higher interest rates. Demand for loans is described by banks as being steady rather than strong, with the greatest weakness being in industrial or national accounts.
The pace of economic recovery is slow and business conditions reflect that situation. Few of our directors report any major change in their investment plans. They regard plant capacity as adequate to meet existing demand, and in industries such as aluminum and lumber investment levels have been reduced somewhat. Businesses also appear to be keeping inventories in line with sales, and no directors report any significant increase in order backlogs. Firms are experiencing a major reduction in estimated delivery times and report no shortages.
Orders for commercial aircraft remain weak, but orders for electronic equipment have increased. The lumber industry faces both lower volume and prices, while prices for pulp and paper remain steady. No recovery is expected for lumber until construction activity recovers. In contrast, demand for corrugated paper products is stronger, reflecting increased consumer demand. Generally, retail sales appear to be a major source of strength in the recovery, and retailers appear to be reasonably optimistic about sales over the rest of the year.
Residential housing activity is improving, but there remains considerable variation across the district. Construction expenditure increases as high as 40 percent above last year are reported in the Seattle area. Vacancy rates are low—less than 5 percent—and home prices have been pushed up accordingly. In California most of the activity appears to be centered in the north. Usually southern California accounts for 60 percent of the housing starts, but currently 68 percent are in the northern half of the state. The Bank of America expects that there will be a modest uptrend for the state as a whole over the next six months, despite this weakness in southern California. Some directors think that higher interest rates, in part caused by Treasury borrowings, may restrain the housing industry until 1976, when lower rates are expected. In Oregon the recent rise in interest rates has pushed mortgage rates close to the state's 10 percent ceiling on loans under $50,000. Further increases would cut real estate financing in that state.
Agricultural prospects in this district appear to be good. Farmers continue to expand acreage under cultivation and they are encouraged by reductions in some costs. For example, nitrogen-forming fertilizers, which had been $220 a ton in early 1975, are now offered at $64 a ton. Farm equipment dealers have large inventories, and significantly reduced prices are being offered. The strength of Russian grain orders, however, remains an unknown factor for wheat. Storage facilities for potatoes and other crops are being increased in eastern Washington and Idaho to meet increasing demand for frozen and processed foods.
Bankers describe the demand for loans as being steady with no particularly strong sectors. Loan demand is greatest in such categories as consumer credit, small business, and retail loans. Some banks report agricultural loan demand as being somewhat weaker and they ascribe this to the increased liquidity of farmers. Over the past few months there has been a strengthening of loan demand in California from utilities, aerospace, and retail industries. General manufacturing, transportation, aluminum and forest products are weak. Several banks commented on the lack of demand from their national accounts and heavy industry.