Federal Reserve District, 12th ; Economic conditions - West (U.S.)

Dean Chen

Verle Johnston

Yvonne Levy

English

Research Papers in Economics

Boom in the West
The West participated fully
this spring in the nationwide
business upsurge.
Banking the Boom
Western banks obtained funds
at ever-higher rates to
finance the spectacular boom.
Cyclical Patterns
Cyclical swings in income
tend to be more moderate in
the West than in the nation.
Business Review is e~ited by William Burke, with the assistance of
Karen Rusk (editorial) and Janis Wilson (graphics).
Copies of this and other Federal Reserve publications are available from
the Administrative Services Department, Federal Reserve Bank of San
Francisco, P.O. Box 7702, San Francisco, California 94120.The Western boom accelerated
this spring, under the impact of
strong national and international
demand for the products of the
region's farms and factories.
During the first four months of
the year, employment increased
significantly throughout the San
Francisco Federal Reserve District
-the nine western-most states-
and preliminary figures for the
late-spring months suggest a
continuation of this trend.
Nonfarm employment increased
at a 5-percent annual rate during
the January-April period-even
faster than the strong 1972 pace
--with much of the strength
showing up in such cyclical
industries as manufacturing and
construction. Trade and service
industries also added large
numbers of new employees,
but government employment
rose only modestly, reflecting a
hold-down on Federal payrolls.
With business activity expanding
strongly on every front, unem-
ployment continued to decline
steeply, as it had throughout
most of the past year and a half.
The jobless rate dropped from 5.9
percent in the final quarter of
1972 to 5.4 percent in
January-April 1973, and it appar-
ently continued to fall in more
recent months, while the national
rate still hovered around the 5.0-
percent mark. The drop was
especially marked in California;
the jobless rate in that state fell
below the national level in May,
in contrast to the situation
throughout most of the past
decade, when it ranged as much
as one full percentage point
above the national average.
Boom-level demands
The strong pace of consumer
buying was maintained through-
out the early months of 1973,
as evidenced by sharp sales
gains not only for autos but for
other types of goods as well.
But with prices soaring, real gains
were only moderate in most
sectors, especially food. The
boom was supported by an up-
surge in consumer credit-espe-
cially for autos-and by massive
increases in tax refunds from the
Federal and (California) state
governments.
Business firms spent substantial
sums on plant, equipment and
inventories in early 1972, in an
attempt to keep up with boom-
level demands. In addition, they
relied heavily on the banks to
finance their operations, account-
ing for over one-half of the first
quarter's total bank-loan expan-
sion. Other factors were involved
in their heavy bank borrowing,
3Rate (Percent)
8
6
4
2
o
'60 '65
4
'70 '73
however-for instance, the
attractiveness of bank lending
rates as opposed to commercial-
paper rates, and the financing
requirements of international
operations during the foreign-
currency crises of February and
early March.
The upsurge in business borrow-
ing was broad-based, both geo-
graphically and industrially.
Machinery manufacturers and
other durable-goods firms were
the heaviest borrowers, although
loan demand was also strong in
the retail-trade and nondurable-
manufacturing sectors.
Fiscal ease
State and local governments
continued to revel in a position
of unaccustomed fiscal ease, with
the help of boom-generated tax
revenues and Federal revenue-
sharing funds. However, the
states remained fearful that they
would lose more from announced
cutbacks in certain Federal pro-
grams than they would gain from
increases in revenue-sharing
funds. Washington organized
an Office of Community Develop-
mentto deal with this problem,
and Oregon planned a special
legislative session to find ways of
financing threatened programs.
Oregon voters meanwhile voted
down a tax-revision plan that
would have revamped public-
school financing by increasing
personal and corporate income
taxes and by terminating most
home owners' property taxes.
Hawaii is still the only state that
finances its school system on a
statewide basis without reliance
on property taxes.
Municipal-bond borrowing began
to pick up from its moderate
1972 pace, as new issues totalled
$988 million for the January-April
period. Local governments in
California, Arizona and Washing-
ton, and state agencies in Wash-
ington, Oregon and Hawaii all
went to marketwith fairly sizable
issues. By late in the first quarter,
growing capital market pressures
showed up in sharply rising
interest rates, but some easing
in rates later developed. In
April, yields on rated general
obligations reached 5.07 percent,
and yields on revenue bonds rose
to 5.43 percent-in each case, at
least 30 basis points above last
December's levels.Change (Percent)
-10 0 20
Significant year-to-year price
increases included potatoes (87
percent), wheat (64 percent),
apples (40 percent) and beef
cattle (22 percent). Among the
majorcrops, only cotton (-12
percent) has suffered a price
decline since last spring. (Cotton
prices have recently strength-
ened, however, because of
heavy sales to the Far East and
The number of cattle and calves
on feed rose in the early spring
months, but the increase was
smaller than expected because
of heavy rains and muddy feedlot
conditions. During the first
quarter, California and Arizona
recorded 3-percent and 12-
percent increases, respectively,
in feedlot receipts-far below the
gains of early 1972. In view of
this relative moderation in supply
and the imposition of ceilings
on retail meat prices, increases in
livestock cash receipts may be
somewhat limited over the year
as a whole.
Aerospace recovery
Western aerospace manufacturers
continued on the recovery path
as they added 7,900 workers to
their payrolls during the first four
months of 1973. This increase
brought total employment in the
industry to 560,000-about 10
percent above the mid-1971 low
but still somewhat belowthe
late 1967 employment peak.
Overall gains were substantial
in both Washington and Cali-
fornia, although in the latter
state, layoffs in the aircraft sector
partly offset gains in the elec-
tronic-equipment sector ofthe
market.
crop receipts are expected to rise
quite strongly this year. 80 60 40
Field-crop production may
expand sharply-especially
wheat, because of higher prices
and the elimination of "set
aside" requirements for wheat
acreage. Spring-wheat plantings
have risen substantially in the
Northwest, with acreage doubled
in Washington and up by half in
Idaho and Oregon. (Yields per
acre might decline, however, be-
cause of recent drought con-
ditions.) In view of this expansion
and the stratospheric level of
wheat prices worldwide, wheat
flood-caused crop damage in the
Mississippi area.) With price
increases of this magnitude, the
gain in gross farm income con-
siderably exceeded the continued
increase in production expenses
duringthe early part of 1973. As
a result, net farm income is now
expected to show another signi-
ficant increase this year.
Wheat
Beef Cattle
Apples
farm boom
The farm boom continued to
dominate the headlines, as cash
receipts jumped 17 percent above
year-ago levels to reach $1.9
billion duringthe first quarter of
the year. (Even so, the gain
lagged the 25-percent increase
recorded nationwide.) Sharply
higherwheat and potato prices
boosted returns to crop farmers
in the Pacific Northwest, while
soaring meat prices contributed
to higher receipts for California,
Arizona and other Iivestock states.
Potatoes
Cotton
5The airlines increased their orders
for medium-range transports
(especially Boeing's 727 and
McDonnell-Douglas' DC-9) at a
rapid clip, on the basis of an
anticipated 10-percent increase
in passenger traffic in 1973.
Orderbooks consequently are
thick enough to ensure full-
capacity operations on these
models through at least the latter
part of this year. But little help
is expected from military and
space spending in coming
months, especially in view of the
windup of the Skylab program
and various other budget
cutbacks.
Construction upsurge
Construction activity remained
very high, in dollarterms, during
the January-April period. Con-
tract awards for residential con-
struction rose 4 percent above
1972's pace to an $8.6-billion
annual rate, reflecting some
increase in the average size of
units as well as a continued rise
in construction costs. Awards
for nonresidential building rose
at a much faster pace while
heavy construction dropped off,
6
as sharp gains for stores, fac-
tories and public buildings offset
declines in awards forconstruc-
tion ofstreets, highways and
electric-power facilities. For the
year as a whole, industry sources
expect some weakening in the
residential sector but a record
high level of activity in non-
residential construction.
The number of housing starts
declined 12 percent below the
average 1972 pace during the
January-April period, to an annual
rate of465,000 units. (During
this period, the market was
weaker in the West than else-
where, in respect both to the
number of starts and the number
of mobile-home sales.) Housing-
permit activity held up well
through March, partly reflecting
efforts by California builders to
get underthe wire priorto the
April 5 expiration of the mora-
torium on the state's environ-
mental-impact law, but permits
then dropped sharply in April
to the lowest level of the past
two years.
Mortgages and savings
Even so, the pace of mortgage
lending picked up in the winter
and early spring months, as a
consequence of the earlier boom
in starts, as well as the efforts
by some borrowers to obtain
financing now in anticipation
of higher mortgage rates later
in the year. Through April,
mortgage portfolios of banks and
savings-and-Ioan associations
expanded by about $1.0 billion
and $2.5 billion, respectively,
while S&L loan commitments
increased over the period to a
record $2.8 billion.
At the same time, weakening
savings inflows this spring raised
questions about the durability of
the mortgage-lending boom.
Over the January-April period,
net savings inflows into banks
and S&L's reached $370 million
and $1.8 billion, respectively-
substantially below the levels of
the comparable year-ago period.
DuringApril, in fact, depositors
at both types of institutions made
net withdrawals, reflecting the
need to meet tax obligations and
the desire to shift funds into
market instruments offering
higher yields.100
Housing Permits
'70 '73 '65
Olo.o.l..........................&....ll-.l._-'-"'-.J..."II...
'60
Thousands
Nonferrous-metal prices rose
sharply over the first four months
of the year, as a devalued dollar
and strong market conditions
abroad raised prices of imported
concentrates and refined prod-
ucts. Domestic copper producers
increased the price of refined
copper 19 percent, thereby re-
storing the quotation to the peak
of 60 cents a pound reached
three years ago, and zinc and
lead producers boosted their
prices by smaller amounts. At
that point, the Administration
announced plans to slash its
metals stockpile objectives, in an
attempt to get more supplies
into the market.
In early April, the Cost of Living
Council acted to reduce Japanese
purchases of American logs and
to increase timber sales from
Federal forests. These actions,
togetherwith the slower pace of
residential construction, helped
improve supply conditions and
thereby triggered a price decline.
Thus, prices of key homebuilding
items dropped as much as 15
percent between early April and
late May.
Price pressures
The insatiable demand for mate-
rials generated by the nationwide
business boom caused prices to
soar in the Western extractive
industries throughout the winter
and early spring months. In
lumber, the Phase III removal of
mandatory controls caused a
sudden price upsurge as North-
west mills adjusted to the "free
market" levels quoted by
Canadian producers. Then, as
demand pressures continued,
lumber and wood-product prices
rose at a 64-percent annual rate
over the January-April period.
Mortgage lending rates there-
upon began to firm, as a conse-
quence of the high level of
mortgage demand and the de-
cline in savings inflows, as well
as the continued concentration
of savings gains in higher-cost
certificate accounts. The average
rate on conventional new-home
loans rose 35 basis points over
the January-April period to 8.05
percent. Moreover, non-price
terms of lending began to tighten,
as lenders increased downpay-
ment requirements and reduced
average loan maturities.
7Metals and oil
Aluminum producers responded
to boom-level demands by
restoring operations nearly to
full capacity, and by obtaining
sharply higher prices for ingot
and fabricated products. Between
December and early April, the
selling price of ingot rose almost
22 percent to the published level
of 25 cents a pound, ending
more than three years of heavy
price discounting. A major pro-
duction problem then developed
in mid-April to complicate the
industry's operations; Northwest
producers were forced to shut
down about 245,000 tons/year of
capacity, when an abnormally
low stream runoff from the
mountains caused a 50-percent
cutback in the interruptible
power supplied by the Bonneville
Power Administration.
The Western steel industry ex-
perienced boom conditions,
especially for construction steel,
as production rose above the
1972 pace and even exceeded
1969's previous record level. The
import surge meanwhile began to
moderate in March, as devalua-
tion plus strong overseas demand
8
induced japanese producers to
turn to other markets. On the
price front, domestic producers
raised prices on a wide range of
structural and tubular products
by 5 percent in early january,
and later announced similar
increases forflat-rolled sheet
products for mid-june. Because
of the price freeze, however,
those june increases did not go
into effect.
Western oil refineries, although
still operating below full capacity,
increased their activity about 8
percent above year-ago levels
in the winter and early spring
months. Refineries were forced
to rely increasingly on foreign
supplies to meet their require-
ments, since crude production
from domestic sources continued
to decline. The Administration
acted in mid-April to help re-
fineries obtain even more foreign
supplies, by suspending oil-
import quotas and removing
all existing tariffs on imported
crude and products.
Oil from Alaska remained only a
distant possibility. The Supreme
Court in April declined to reverse
a lower-court decision barring
construction of a trans-Alaska
pipeline, on the grounds that the
pipeline would violate a provision
of a 1920 act limiting rights-of-
way across public lands. Even
if Congress removes this road-
block this year, it could be 1978
before oil starts to flow from
Prudhoe Bay.
All in all, the Western economy
participated fully this spring in
the nationwide business upsurge,
the strength of the boom being
reflected in the faster-than-
national drop in the jobless rolls.
With the possible exception of a
slowly recovering aerospace
industry and a slowly declining
housing industry, output of the
region's farms and factories
expanded at a near-capacity pace
over this period. Given the
present state of orderbooks,
continued substantial gains seem
assured for most of the rest of
the year.
Verle Johnston, Yvonne levy
and Dean Chen

Boom in the West

http://www.frbsf.org/publications/economics/review/1973/econrev_73myje_3-8.pdf

Boom in the West

Abstract

Similar works

Full text

Available Versions

Research Papers in Economics