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

Dean Chen

Verle Johnston

Yvonne Levy

English

Research Papers in Economics

2
MonetaryPolicy: Aletter
... Chairman Burns examines the
record of monetary policy, in
a letter to Senator Proxmire.
Weakening Boom?
... The Western boom showed signs
of weakness even before the
onset of the energy crisis.
Fueling Bank-loan Growth
... Third-quarter loan upsurge
helped by sell-offofsecurities
and by expansion of CD funds.
Business Review is edited 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 continued
during the summer and early
fall months, helped along by the
upsurge in the farm sector and
in the export trade. At the same
time, production became seri-
ously strained by shortages of
fuels and other basic materials. A
slowdown in employment growth
reflected some of these supply
difficulties, but it probably signi-
fied also a weakening ofdemand
in certain sectors of the regional
economy. Then, as the fuel
shortage worsened in late fall,
many observers began to revise
downward theirforecasts for
regional business in 1974.
Civilian employment increased at
less than a2-percent annual rate
during the third quarter, extend-
ing a deceleration which first ap-
peared during the spring period.
Jobs continued to expand in most
industries, but sluggishness was
apparent in several fields, such
as non-aerospace manufactur-
ing. Not surprisingly, the un-
employment rate remained rather
high, averaging 5.5 percent dur-
ing the third quarter, just as it
had for most ofthe earlier part
ofthe year. In view of a slower-
than-national rise in employment,
the regional jobless rate remained
above the national rate during
the quarter, and this situation
continued in October as the
national rate fell from 4.8 to
Consumer buying generally held
at a high level, despite the first
signs ofweakness in durable-
goods sales and a deceleration in
instalment-credit growth. Yet
with prices soaring, real gains
moderated in most sectors,
especially food.
Business firms continued to spend
substantial sums for new plant
and equipment, in an attemptto
keep up with heavy boom-level
demands. Public utilities, trading
firms and durable-goods manu-
facturers relied heavily on bank
term loans for their capital-goods
financing. In short-term financing,
bank-credit demand slackened
towards the end of summer as
firms rechanneled much oftheir
business to the commercial-paper
market, following a decline in
paper rates below the banks'
prime-loan rate. But retailers and
some manufacturing firms, espe-
cially in machinery and transpor-
tation equipment, maintained a
heavy demand for bank credit.
State and local governments
remained in a relatively easy fiscal
position, helped by boom-
generated tax revenues and
further infusions of Federal
revenue-sharing funds. At the
same time, municipal-bond
financing continued stronger than
in 1972; for the year to date, new
issues have totalled about $2.2Western farmers and ranchers benefitfrom soaring prices,
with wheatbeingonlythe most conspicuous example
year-ago pace. Duringthe third
quarter, local governments in
California and Arizona, and state
agencies in Alaska and Oregon,
wentto market with sizable
issues.
Farming: banneryear
Western farmers this fall began
closing their books on a banner
year. Total cash receipts may
approach $11.0 billion in 1973,
about 24 percent above last
year's record, and netfarm in-
come couId rise even faster to a
record $3.3 billion, despite falling
government payments and rap-
idly rising production expenses.
Sharply higherfield-crop prices
and expanded fruit and vegetable
production are contributing to a
record gain in crop receipts, off-
set only partly by a drought-
induced 17-percentcutback in
the Pacific Northwest's wheat
crop. Similarly, record price in-
creases are boosting returns to
last summer's price freeze. Live-
stock production has been run-
ning below year-earlier levels,
with cattle and calf slaughter
duringthe January-September
period falling about 6 percent
below the comparable 1972
figure. Prospects for livestock
production now look more prom-
ising, however, in view ofthe
lifting of beef price ceilings and
the availability of bumper feed
crops. The number ofcattle and
calves on feed this fall was about
2 percent higher in California,
and 4 percent higher in Arizona,
than ayear ago.
Aerospace: stronger
The Western aerospace industry
remained a positive force on the
regional employment scene,
adding 13,200 workers to its pay-
rolls between June and October.
Total employment in the industry
now stands at S80,SOO-about
1S percent above the mid-1971
low butstill about 2S percent
below the late-1967 peak. Both
California and Washington
shared in the gain, which was
centered in electronic equipment
and aircraft and reflected the
strength of the commercial
market for those products. A
highlight of the Washington aero-
space market was the strong pace
oforders for the Boeing 747. As
of September, the Company had
received atotal of 29 orders for
the wide-bodied plane, compared
160 120
livestock producers substantially,
more than offsetting a moderate
decline in the volume of
marketings.
The sharp price rises underlying
the Western farm prosperity re-
flect to some extent the boom in
farm exports. In fiscal 1973, West-
ern farm exports jumped to an
all-time high of $1.5 billion. The
sharpest gains were registered
by Pacific Northwestfarmers,
with the area's wheat exports
alone far more than doubling in
a single year's time. Moreover,
export demand for farm products
remains strong, especially for
wheat, cotton and rice.
For livestock producers, 1973
remains adifficultyear despite
soaring prices and incomes. They
have had to contend with soaring
feed costs, along with the market
uncertainties arising from last
spring's consumer boycottand
Percentage Change (1972.3-1973.3)
o 40 80
EGGS
TURKEY
WHEAT
COTTON
BEEF CATTLEwith only 7 for the comparable
period a year ago.
While the civilian sector has
been responsible for most of the
recent strength in aerospace
employment, the ability ofthe
industry to sustain employment
growth next year may well de-
pend upon the emerging strength
of the defense market. The Arab-
Israeli war may provide addi-
tional thrust to an already evident
uptrend in military spending. The
Pentagon has submitted a $2.2-
billion supplemental budget
request, mostly to replace war
material furnished to Israel, and
it may ask for more funds to buy
transport planes and expand its
inventory of sophisticated
missiles.
A slowdown in commercial-
aircraft orders seems all but
inevitable, on the other hand, in
light of the poor traffic and earn-
ings reports emanating from the
nation's major airlines, plus the
cutbacks in scheduled flights
necessitated by the current fuel
shortage. lockheed has an-
nounced plans to layoff 1,500
workers by January, because of
the decision of one of its major
airline customers to postpone
delivery of nine l-1011 jetliners,
and the profits outlook for this
and other aerospace manufac-
turers has become somewhat
clouded.
16
Construction: mixed
The pace ofconstruction activity
increased duringthe third quar-
ter, with construction awards
rising about 9 percent to a $15.4
billion annualrate. The increase
centered largely in the non-
residential sector: as a result, this
District contributed more than its
share to the nation's fixed-invest-
ment boom. Non-residential
construction surged to new highs
in virtuallyevery state ofthe re-
gion, with awards rising substan-
tially for commercial, educational
and (especially) manufacturing
facilities. Heavy construction
activity also advanced during the
quarter, largely in response to
increased demand for water-
supply and waste-disposal
systems.
In the residential sector, activity
continued to recede from the
early-1973 peak, with a sharper-
than-national decline. The num-
ber of Western housing starts
declined to a 422,000-unit annual
rate, some 21 percent below the
1972 pace. (The decline in dollar
terms was less, reflecting the
continued upsurge in construc-
tion costs.) Mobile-home sales
meanwhile trailed last year's pace
in most District states.
The early-1973 downturn re-
flected a general weakeningof
housing demand, and thus pre-
ceded the late-spring run-up in
interest rates. The more recent
decline, in contrast, reflected a
growing stringency on supplies
of available funds and an atten-
dant rise in borrowing costs.
Western S&l's experienced a net
outflowofsavings, because of the
strong competition from inceas-
ingly attractive money-market
instruments. (The bellwether
Treasury-bill rate rose from 7 per-
cent in June to over 9 percent in
mid-September-afull percent-
age point above the early-1970
tight-money peak). New savings
actually exceeded the year-ago
inflow by almost 30 percent, but
a doubling of withdrawals re-
sulted in an overall net outflow of
$165 million. California S&l's
accounted for all ofthe loss, how-
ever; most other District states
recorded continued (albeit re-
duced) savings inflows. For their
part, large District banks posted
a net inflow of $313 million-
several times the previous quar-
ter's inflow-as a substantial
increase in consumer-type certifi-
cate accounts more than offset
a large loss in passbook savings.
The mortgage-lending pace re-
mained at a fairly high level even
in the face ofthis overall slow-
down in savings flows. District100
Thousands
'73 '70 '65
O~-'-"""L...I""""""'..L-IL-L."""...L-L­
'60
Housing Permits
Nonferrous-metals producers
were prevented by price controls
from raising their prices during
this period, despite the world-
wide boom in demand which
sent foreign prices soaring well
above u.s. producer quotations.
The outflow of metal to overseas
markets combined with produc-
tion problems to create serious
shortages, which in one case
(zinc) forced a major steel pro-
ducer to discontinue galvanizing
Regional housingactivity shows
decline, measured onany basis
By October, wholesale prices for
softwood lumber were almost
4 percent belowtheir May peak,
while softwood plywood prices
were almost 37 percent lower.
The turnaround was triggered by
governmental actions to increase
supply, and the price decline
continued as housing activity
slowed. However, the closure of
six Oregon plywood mills in mid-
October, due to a shortage of
glues and fuels, touched off a
wave of scare buying, and initi-
ated a 30-percent surge in prices
for key items within a month's
time.
Materials: short
Strong demand and upward price
pressures characterized the mar-
kets for most Western-produced
basic materials this summer and
fall. The one major exception
was forest products, and even
there a shift is now in the wind.
Lumber prices had advanced
almost without interruption for
2% years until last spring, but
were already dropping from rec-
ord levels when the 60-day freeze
was imposed in mid-June, so
that the Cost of Living Council
felt safe in exempting the industry
from Phase IV wage-and-price
controls.
S&L's increased their mortgage
portfolios by $1.1 billion during
the third quarter, partly by reduc-
ing their cash and liquid invest-
ments, and partly by drawing on
advances from the Federal Home
Loan Banks and other borrowings.
District banks increased their
mortgage loans by $1.2 billion,
with roughly three-quarters of the
total in residential mortgages.
Some individual banks became
less willing to make mortgage
commitments, especially for
multi-family units, but banks gen-
erallydid notcurtail their lending.
Mortgage borrowing costs rose
substantially during the summer
quarter, reflecting both the con-
traction in savings inflows and
the rising cost of funds associated
with the mid-year increase in
rate ceilings payable on savings.
The average rate on conventional
loans rose from about 8 percent
in earlyJune to almost 9% per-
cent in late September, even
exceeding the rate increase re-
ported nationwide. In October,
however, a numberof lenders
began paring their lending rates
-in some cases to 8% percent
on prime-quality homes-in
response to a decline in money-
market rates and an improvement
in bank and S&L savings inflows.The West thus will be con-
fronted with severe problems
because ofthepetroleum crisis,
but itcould also playa major role
in the long-term solution ofthe
crisis. On the consumption side,
heating-oil problems could be
less severe than elsewhere, at
least partly because ofthe milder
temperatures on the Pacific rim,
where mostofthe region's people
live. Gasoline maybea different
matter, notonly because West-
erners rely almost completely on
the private auto as a means of
transportation, but also because •
Western driving involves much
longerdistances than driving
elsewhere. On the production
side, the crisis has already has-
tened Congressional acceptance
ofthe Alaska pipeline, and itmay
also hasten the exploitation of
Rocky Mountain coal and shale-
oil resources, which up to now
have lain idle because ofboth
economic and environmental
considerations.
Verle Johnston, Yvonne Levy
and Dean Chen
supplies from Canada-another
large exporter-alsowill be
affected bythe Arab moves.
Western refinery activity is
bound to decline as a result ofthe
Arab embargo on oil shipments
tothis country and related cut-
backs in their shipmentsto other
nations. Priorto the embargo,
Arab states were supplying over
one-third ofthe crude oil im-
ported into the Pacific region, but
Western oil refineries boosted
their operations to near-capacity
levels duringthe summerand
early fall, and thereby recorded a
7-percentyear-to-year increase
in output. Foreign crude flowed
in at an increased rate after mid-
April, when the Administration
suspended oil-import quotas and
removed existing tariffs on crude
and products. These imports more
than made upforthe continued
decline in domestically-produced
crude.
which induced Japanese pro-
ducers to turn to other markets.
Despite its improved balance
sheet, the domestic steel indus-
try was one of the first to receive
permission to boost its prices
after the freeze was lifted this
summer. The Cost of Living
Council supported industry argu-
ments that a 4.8-percent increase
in prices for sheet and strip items
was justified on the basis of
higher costs, as well as necessary
to finance the new capacity re-
quired to prevent afuture "steel
crunch."
operations. Fearful that supple-
mentary supplies from the gov-
ernment stockpile would soon
run out, producers asked Con-
gress to authorize the release of
additional stockpile metal, but
passage ofsuch legislation
seemed remote because of
national-security considerations.
Pacific Northwest aluminum pro-
ducers were hard-pressed to
meetcustomers' heavy demands
because ofa shortage of hydro-
electric power. This drought-
caused shortage forced a cutback
in operations to 75 percent of
capacity by mid-July. During the
summer months, the domestic
industry relied on government
stockpile metal to meet 20 per-
cent of customers' total require-
ments, but by November all of
the aluminum authorized for sale
had been withdrawn, pointingto
even more serious supply prob-
lems in future months.
The Western steel industry ex-
perienced the highest third-
quarter production levels in its
history, as output surpassed the
year-ago mark by 10 percent.
The industry benefited not only
from the strong demand for steel
for non-residential construction,
but also from aslowdown in the
flow of foreign imports. Steel
importstapered off in response
tothe devaluation ofthe dollar
and strong overseas demand,
18 .it
_ __l1lil1lil1li111· [1I-1II •••••••· •••1lI •••••· ·· ...• [.111111 •·•

Weakening boom?

http://www.frbsf.org/publications/economics/review/1973/econrev_73novdec_14-18.pdf

Weakening boom?

Abstract

Similar works

Full text

Available Versions

Research Papers in Economics