February 11, 1976
More optimism than caution characterizes the most recent attitudes of our directors concerning business trends. Retail trade has sustained its year-end buoyancy and advance orders are dramatically higher than a year ago. For many manufacturing industries, e.g., steel, pulp and paper, and clothing, operating rates have increased substantially in recent months; in some instances such as lumber and wood products and electronics, operating rates have at least firmed or have moved up slightly. In the aircraft industry, however, business has resumed a declining trend after a period of stabilization. Order backlogs are disappearing and layoffs are mounting. In agriculture, prices are generally lower than they have been in two years and crop prospects are good. Lower feedgrain prices have activated cattle feedlots and brought a sharp increase in cattle slaughterings.
The year-end acceleration of consumer spending was sustained through January causing a slight shift of emphasis from caution to optimism on the part of retailers. Order backlogs have built up to a "respectable" level, especially for automobiles. A national clothing manufacturer indicated that orders for spring and summer wear were "very much better" than a year ago and that ''January orders were excellent."
Except for the aircraft and heavy construction equipment industries, manufacturers report gradual improvement in business over the past three months. Operating rates have risen substantially in the steel, pulp and paper, and clothing industries, and have increased noticeably in the lumber and wood products, electronics, and chemical coatings industries. Regarding the lumber industry, however, one director commented on the concern of the industry over pending lawsuits that could reduce timber sales by 50 percent, noting that the "environmentalists are winning all the way so far." While new orders for machinery are picking up, it is estimated by one director that "an additional six months would have to elapse before operating rates of a year ago are realized."
The aircraft industry is facing a very depressed market. Backlogs are down and business has slipped to about half of what it was last year at this time. Industry employment is declining. Manufacturers complain that "the CAB will not agree to fare increases but the costs of fuel and labor continue to go up." Prices are being heavily discounted as producers are forced to choose between market share and profit margin. Developments are tied to a world market and are responding to slow growth in Japan and Western Europe as well as domestic demand.
For most industries, on the other hand, prices have firmed over the past three months. Discounts and special deals are rapidly disappearing so that effective prices have generally increased. In some instances, however, e.g., farm machinery, chemical coatings, and marine products, price increases have had to be rolled back. The actual cost of producers' materials is reported to be increasing, but at a decreasing rate.
The agricultural community is being careful about new expenditures and planning for reduced net income for the next several years. Commodity prices are reasonably lower than they have been in the last two years and there is no anticipation of change. Crop prospects are generally good with feedgrains stored about 10 percent higher than a year ago. With increased feedgrains on hand, placement of cattle in feedlots during the last quarter of 1975 rose 23 percent in Oregon, while marketing for slaughtered cattle rose 21 percent.
In response to a question regarding the probable effect of lower interest rates on construction activity, a director from a large west coast bank believes that additional expenditures over those already planned will be modest. "Further significant increases in housing starts will be limited by high selling prices well beyond the financing capability of most families, plus some remaining surplus housing built earlier. Fortunately, this unsold inventory is now small in California and mostly multifamily. Land development suitable for new housing is proceeding very slowly for environmental and financial risk reasons. Significant increases in commercial construction will be held back by some excessive vacancies and by needed investment expenditures for new and depreciated equipment."