July 13, 1977
Economic activity in the Twelfth District is currently characterized by moderate growth. Current investment plans are mixed, with considerable investment activity taking place in energy and aerospace and little activity taking place in agriculture, aluminum, pulp and paper (except for some environmentally induced investment in the latter two). Production continues strong in aerospace, pulp and paper, and agriculture, and the latter sector is facing unprofitably low prices. Business loan demand is generally experiencing a very modest growth, though this, too, varies considerably within the District. Twelfth District banks are not experiencing a significant net outflow of savings.
Investment plans vary considerably by industry with the largest increases coming in aerospace and the smallest in agriculture. Likewise, the share of investment devoted to meeting environmental and worker safety regulations varies by industry. Boeing, for example, reports that their 1977 level of investment will be three times the average for the past five years, with practically all of this going for equipment replacement and facility modernization. They report environmentally-induced expenditures to be negligible. On the other hand both the aluminum and the pulp and paper industries report low levels of investment with substantial shares being used to meet environmental standards. An aluminum spokesman sees no significant investments to increase either primary or secondary capacity due to a) energy uncertainties, b) environmental delays, and c) poor profits in recent years. The pulp and paper industry also faces slow growth in capacity (2.5 percent for both 1976 and 1977) —considerably below the expected growth in demand, and attributable to low prices. One large pulp and paper firm is devoting one-third of this year's investment to pollution abatement. Substantial investments by energy companies are reported in domestic gas exploration, coal gasification, and facilities for liquifying natural gas shipped from Alaska to California. Major oil producers, however, are said to be concentrating their investment offshore since the domestic investment climate is still not favorable.
Low prices and a drought-induced increase in operating costs have kept investment in the agricultural sector to a minimum, and at least one more lean year for both profitability and investment is expected. The only exception to this is a considerable increase in grain storage facilities prompted by low grain prices and aided by a new, government program providing 7 percent, five-year loans covering 85 percent of the value of new storage facilities.
Aerospace continues brisk production and sales, with Boeing having sold out of 747's through June 1979. Factor and product prices in that sector are rising at about the general rate of inflation. Production in the pulp and paper industry also continues at full swing, though there are some reports of weakening demand, especially export demand. Still, prices continue rising and are expected to average about 20 percent over last year. Aluminum production is not expected to keep pace with demand at current prices and prices are expected to rise for the remainder of this year.
Large world and national crops have kept most district agricultural prices (especially those for grain and cattle) relatively low. While the effects of the drought still linger, one increasingly gets the impression that concern earlier this year was overplayed. For example, irrigated wheat output in one area of Washington is now expected to-be roughly 120 percent of normal. Good pear, apple, peach, prune and potato crops are also reported for the Pacific Northwest.
Business loan, demand, like investment activity, varies markedly within the district. While the overall picture that emerges is one of very moderate growth, Utah reports rapid growth and Idaho and Washington report zero growth in loans to businesses. Continued population growth is at least partially responsible for Utah's strong business loan demand, and one banker said that demand has increased so much that he had adopted a more restrictive loan policy as of June 1. While a number of respondents described business loan demand as continuing flat, several areas in California and Oregon did report some strengthening over the past several weeks. Almost all growth in business loan demand is attributable to local, intermediate-sized enterprises and practically none to national corporate clients.
Our directors were asked about savings flows, and they saw little evidence to confirm the unseasonably large outflow of savings observed nationally over the past two months. Only one Los Angeles director reported having a visible outflow of some interest-sensitive money and most did not even observe a significant net outflow of savings over the past two months. Several Oregon banks reported a weak May and strong June while two southern California banks reported just the opposite. Only one Idaho bank reported a significant recent outflow of savings, but this was attributable to very localized competition from a credit union.