July 14, 1976
In the opinion of our directors, the recovery is proceeding at a moderate, sustainable pace. Inventory-sales ratios are being kept low deliberately and hoarding psychology seems non-existent. Except for natural gas, supply schedules are generally being met with only an insignificant number of delays being reported. In the absence of capacity growth, however, scarcities might develop in 1977 in the aluminum, high-grade paper and chemical industries. The agricultural outlook is fair in spite of drought conditions in some areas. The market for aircraft appears to be picking up. Money center banks continue to be disappointed with the low level of loan demand.
Our directors were asked to comment on the fact that the 15 percent rise in total business sales during the first year of the current economic recovery was accompanied by only a one percent rise in inventories. The majority reported that these trends generally reflected their own company's experience and that the cautious inventory policy was deliberate. The 1973-74 recession which, in many cases, involved a costly sell-off of swollen inventories, is fresh in their minds. Moreover, many cite the high cost of borrowed funds as a deterrent. They also credit efficiency measures adopted since the recession which allow operating at lower stock-sales ratios.
Except in the cases of coffee where forward buying is active and copper where the accumulation has been involuntary, there is little evidence of a hoarding psychology. Filling of orders by vendors has generally remained timely, although some delays have been reported in the retail sector and in the area of construction materials such as electrical and plumbing fixtures. In the lumber industry, the inventory gain has matched that of sales over the past year.
Surveys by a large West coast bank indicate that businessmen now plan to increase their inventories in step with sales gains, and, with few exceptions, they feel that stock levels now are just about right. "The recent slowing down in inventory building augurs well for a solidly based, long up-trend in the economy."
Except for natural gas supplies, present shortages of materials generally do not represent a critical or disruptive problem. Under conditions of continued real growth above 4 percent, it is thought that shortages could develop in the aluminum, high-grade paper, and chemical industries during the second half of 1977. There is also some possibility that cattle will be in short supply by year-end 1976. No instances of capital expansion were cited.
In spite of drought conditions in California and the Teton flood disaster in Idaho, the agricultural outlook remains fairly good, but the final outcome is still a matter of speculation. Farm prices are considered low; some 1975 potatoes and beans are in storage due to low price and demand. But plantings are in and much now depends on the weather. Fat cows and dressed meat prices have dropped $5 to 10 per CW recently, as excessive numbers were brought to livestock commission sales.
Pockets of increased construction activity are appearing in the West, but the trend is generally flat. Utah claims a 33 percent increase over last year in residential housing activity and Southern California is reporting gains. Strength in housing seems closely associated with increases in area employment.
There has been a promising renewal of government contract activity for aircraft; bids are being taken on 12 to 15 new programs. On the commercial side, new orders for placement of equipment have prompted a 15 percent improvement in the production rate of one large manufacturer. The average domestic airplane is 8 years old and this should eventually affect replacement demand.
Loan demand at money center banks has continued sluggish; even consumer lending which had been vigorous, has slowed somewhat. Banks with overhanging REITs' problems are finding the slow pace of the recovery helpful. Bank profits for the first six months of 1976 are expected to follow the pattern of the first quarter; a very few banks are expected to report increases in second quarter earnings over the first quarter.