February 9, 1977
In the opinion of our Directors, the recovery has been strengthening on a broad front, but there is great concern over the economic implications of the low rainfall in the West and low temperatures in the East. In most non-agricultural areas of the District, consumer spending exceeded expectations in December and into January. The recovery in housing is proceeding at a rapid rate and early signs of a pickup in nonresidential construction have been reported. The low rainfall and snowpack in the West will curtail hydro-electric power output. The Bonneville Power Administration has already stopped the flow of interruptible power to aluminum and chemical plants in the Northwest. The forest products industry has benefited from the extension of their logging season, but the dry weather has heightened the danger of forest fires. Plans for limiting irrigation water to agricultural areas are underway in many District states.
Most areas of the District report record December retail sales and a continuation of the trend into January. The exception is agricultural areas where lower incomes have dampened consumer spending. Along the Pacific seaboard and other areas where the housing boom has been gathering strength for a year, sales of furniture, appliances and carpeting are very strong. Current sales gains for new cars are ranging 12 to 60 percent over last year. Large cars, pick-ups and vans continue to be popular while smaller car sales lag expectations.
The construction industry is expanding at a very rapid rate. Housing starts are up 30 to 50 percent over last year in many areas. Because of the cost of land, lead time required and interest on property during the development stage, builders claim there is no low cost housing, that the cheapest house would cost $40,000 to $45,000 to produce. As a result, they believe that the stage is set for a "rather dramatic shift to multi-unit housing" that will be evident within the next 4 to 5 months.
Moreover, a turnaround is occurring in nonresidential construction. "Major plants are being planned and the plants are going to go ahead. It is a good market for building. There are no shortages and you can get quality workers." Complaints are made, however, that environmental requirements and the demands of City Councils often hold up a project for a year to eighteen months. The renewed interest in plant and equipment spending is reflected in growing backlogs at steel plants and the shift in the composition of demand to more plate and structural forms.
Many of our Directors commented on the economic effects of the current drought in the West and freezing conditions elsewhere in the country. The following areas of special concern were discussed.
Electric power
The Columbia River flow is now at 68 percent of normal and will
probably fall below that. The Bonneville Power Administration has
already cut off interruptible power to aluminum and chemical plants.
(These plants depend about 25 percent on interruptible power.) In
Oregon, the Trojan nuclear plant came on stream and in December it
was operating at 95 percent of capacity and carrying 40 percent of
Portland General Electric's load. The fuel cost was about one-
seventh of what it would have been using oil- fired generating
facilities. Pacific Gas and Electric Co. of California has a nuclear
plant that is finished, but operations will be delayed another 6 to
9 months by the regulatory commission. One Director states that
there is a heavy inventory of No. 5, No. 6 and No. 2 heating oils,
substitutes for natural gas, but there is difficulty getting it to
the needy areas. California utilities have reversed inflow on the El
Paso line and are sending natural gas to Texas. Exploration for
natural gas will not pick up, according to one Director, until
controls on inter-state pricing are removed. Currently, the intra-state producer is getting about $1.55 per cubic foot whereas the
inter-state producer is getting about $.52 per cubic foot.
Agriculture
Plans for water allocations to farm and residential areas are
underway in most states. During the past season available water was
used in California's Central Valley for cotton rather than for
alfalfa. This will make feed grain for cattle exceptionally scarce
and cattlemen are now reducing herds. Prices for agricultural
commodities are expected to increase sharply this year. So far,
however, crops are still in a state of overproduction and farm
income continues low.
Industries
The skiing industry was a total disaster this year and many
businesses will probably go under causing problems for bankers. The
only industry to wring some good out of the current drought is
forest products where the weather has allowed logging operations to
continue through the winter. Even here, however, the low rainfall is
having unfavorable consequences in that the Northwest had a forest
fire in January, an unheard of event before this year.