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January 16, 1976 Western Slump— and Rebound West of the Continental Divide, business activity slumped badly in early 1975, but then began to recover in the second half of the year. The recession itself was some what shallower in this region than elsewhere, and for that reason, Western statistics for 1975 gener ally were more respectable that the nation's. Civilian employment inched slightly ahead of the previous year's level to 13.3 million, compared to a slight decline nationally. The number of jobseekers grew at a rapid pace, however, so that unem ployment soared from 7.2 percent to 9.6 percent of the civilian labor force—a full percentage point higher than the national rate. Still, that differential narrowed considerably during the year, reflecting the relatively greater severity of the slump in other regions. Personal income increased about 11 percent in the West to roughly $208 billion. Indeed, almost all of the nine Western states recorded double-digit growth rates, and Alaska's pipeline boom brought about a one-third increase in that state's income in just one year's time. Inflation of course contin ued to eat into income gains, but the deceleration of the price trend—along with the tax cut— permitted a significant improve ment in real after-tax income. This in turn encouraged a revival of consumer buyingthroughoutthe region, even more striking than the sales recovery elsewhere.1 1 Drop in manufacturing Because of the steep early '75 slump, manufacturing production dropped 3 percent for the year. (That was still considerably better than the nation's 10-percent decline.) Yet once the bottom was reached around midyear, factory output bounced back in both durable- and nondurable-goods lines. The West's crucial aerospace manufacturing industry encoun tered rough weather during the year, as its three-year-long recovery from the post-Vietnam recession suddenly came to a halt. Employment in this industry dropped 6 percent in 1975, and stood 26 percent below the Vietnam peak, reflecting a slow down of orders for both civilian aircraft and electronic products. Domestic and foreign orders for commercial aircraft dropped off substantially, as sharply rising fuel costs and declining passenger traffic caused the world's airlines to delay purchases of wide-bodied and other transports. Industrial and consumer purchases of civilian electronic products also lagged badly during early 1975, but busi ness improved substantially in those categories in the latter part of the year. The aerospace decline was cush ioned, however, by an upsurge of orders for military and space products. Military prime-contact awards rose almost 24 percent during fiscal 1975, providing in(continued on page 2) Opin ions expressed in this newsletter do not necessarily reflect the views of the management of the Federal Reserve Bank of San Francisco, nor of the Board of Governors of the Federal Reserve System. creased funding for a number of ongoing missile and aircraft pro grams. In the process, the regional industry's share of the Penta gon's total procurement budget rose from 27 to 29 percent. Spaceagency awards also rose sharply, primarily for the development of the space-shuttle program. Mixed farm results Western farmers and ranchers reported a mixed year, with cash receipts rising modestly to about $16 billion, but with net farm income falling slightly because of continued increases in produc tion expenses. Overall, the farm sector remained on a high and prosperous plateau, with cash receipts running twice as high as in the early 1970's. Much of this activity could be traced to the export trade; farm exports from West Coast ports were about three times higher than in pre devaluation days. Bumper crop production in many areas was offset by a declining price trend, leading to an actual decline in crop receipts. Cotton production was off by a third due to a decline in demand, but wheat and rice bins were fuller by about 20 percent. Wheat prices, although rising in the wake of the Russian wheat sale, still fell sharply below the $4.52-a-bushel average price of the previous year. Livestock producers largely com pleted the production cutbacks they had begun in 1974, under the 2 spur of high feed prices and consumer resistance to highpriced beef. The turnaround thus helped livestock receipts to recover from their 1974 decline. This shift went hand in hand with a strong upturn in beef-cattle prices, which by fall were 20 percent above the early-1975 low. Larger supplies and lower prices of feed grain rein forced this improvement in the livestock picture. Construction: end of tunnel? Western construction activity held up fairly well in 1975, with new contract awards running close to the previous year's total of $18 billion. (Nationally, activity fell about 4 percent for the year.) The poorest Western performance was in "nonbuilding" projects— highways, dams, and utility plants—despite Alaska's huge increase in spending for the oil pipeline. In housing, new starts dropped 1 percent below the 1974 level to 276,000 units, but that figure masked a rising production trend, since starts roughly doubled between the winter and fall months. The generally low level of housing activity meant a continuation of the lumber industry's slump, with production falling 7 percent for the year to the lowest level of the past three decades. Demand picked up significantly in late year, however, as the housing upturn gained momentum and as whole salers sought to replenish their severely depleted inventories. Consequently, softwood-lumber prices by December rose 13 percent above the late-1974 low. In the pulp-and-paper segment of the industry, where demand closely parallels national economic trends, the early part of the year was very weak but the second half told a different story. Weakness in metals The regional steel industry cut back production drastically in 1975, reflecting a decline in nonresidential-contruction demand and a liquidation of dis tributors' excess inventories. Out put fell about 17 percent to less than 6 million tons, the lowest level in more than a decade. The decline would have been even worse had not steel-users reduced their purchases of foreign steel. For aluminum producers, the year was characterized by sluggish production, excess capacity and excess inventories. Despite the late-year improvement in business, producers had trouble maintaining a 3-percent price in crease announced in August, and at year-end, all of the potlines shut down during the earlier slump remained out of production. Other nonferrous-metals produc ers suffered even more serious price erosion, as worldwide reduc tions in supply failed to bring markets into balance. Copper producers scaled back their mine and smelter production to about 3 75 percent of capacity by midyear, but the depressed level of de mand in final markets—especially autos, housing and appliances— led to a steady buildup of excess inventory. Consumption of petroleum pro ducts declined during 1975, as high prices, conservation efforts and the economic recession acted to reduce business and household demand. Refinery output mean while rose about 4 percent above 1974's reduced level, with an increase in imports more than offsetting the continued decline in domestic crude production. In the process, the proportion of the regional market supplied by for eign oil rose to a record 42 percent. Refined-product prices at yearend were 15 percent higher than a year earlier, mostly because of the rising cost of imported oil. All things considered, the new year begins on an upbeat for the Western economy, despite the continued weakness of some key regional industries, and despite the prev alence of jobless rates that are even higher than the national figure. One strong indicator of future prosperity is the heavy domestic and foreign demand for Western food products and energy resources. Another hopeful sign is the completion of the nationwide inventory adjustment, since West ern crude-material producers should be among the initial benefi ciaries of any inventory restocking process. Regional staff uoiSujqsEM • qein . uoSojo • epeAON • oijepi MEM BH . E |U J O p |E 3 . E U O Z J jy . BANKING DATA—TWELFTH FEDERAL RESERVE DISTRICT (Dollar amounts in millions) Amount Outstanding 12/31/75 Change from 12/24/75 Loans (gross, adjusted) and investments* Loans (gross, adjusted)—total Security loans Commercial and industrial Real estate Consumer instalment U.S. Treasury securities Other securities Deposits (less cash items)—total* Demand deposits (adjusted) U.S. Government deposits Time deposits—total* States and political subdivisions Savings deposits Other time deposits}: Large negotiable C D ’s 90,207 66,811 1,729 24,048 19,599 10,240 10,754 12,642 91,043 25,131 326 63,415 7,610 22,193 29,860 16,068 + 1,086 + 945 + 344 + 513 + 2 + 44 + 188 47 + 2,139 + 1,236 32 + 564 + 273 + 327 + 78 167 - Weekly Averages of Daily Figures Week ended 12/31/75 Selected Assets and Liabilities Large Commercial Banks Member Bank Reserve Position Excess Reserves Borrowings Net free(+)/Net borrowed (-) Federal Funds—Seven Large Banks Interbank Federal fund transactions Net purchases (+)/Net sales (-) Transactions of U.S. security dealers Net loans (+)/Net borrowings (-) + 119 24 95 Change from year ago Dollar Percent + 2,905 1,467 13 840 429 + 320 + 4,613 241 + 5,432 + 1,396 + 0 + 3,859 69 + 3,963 81 - 822 Week ended 12/24/75 + + 3.33 2.15 0.75 3.38 2.14 + 3.23 + 75.12 1.87 + 6.34 + 5.88 + 0.0 + 6.48 0.90 + 21.74 0.27 - 4.87 Comparable year-ago period 110 23 87 - 79 137 58 + 1,339 + 1,618 + 1,656 + + + 620 573 914 ‘ Includes items not shown separately, } Individuals, partnerships and corporations. Information on this and other publications can be obtained by calling or writing the Public Information Section, Federal Reserve Bank of San Francisco, P.O. Box 7702, San Francisco 94120. Phone (415) 397-1137. E>|SE|V
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