A Year of lmprovement

Miner H. Baker Vice president and economist Seattle-First National Bank

TWO things impress this observet

I about the economic scene: one is that consumers and businessmen alike are deeply concerned: the other is that they have reason to be.

The worst recession since the Thirties has indeed bottomed out, and the statisticsof the thirdquarter were good enough to be highly encouraging if they were for real. In fact, however, it appears that inflation was understated, real growth was overstated, and much of the latter was due to a swing in inventory correction which cannot repeat itself. There is little reason to believe that the recovery will be either rapid or smooth.

One obvious risk is inherent in the conflict between high inflation and high unemployment. Inflation, even at 5%, is more than double what we should tolerate, and may occasion the monetary authorities to slam the lid on money supply once again well before production and employment have reached an optimum level.

Perhaps this look beyond 1976 is borrowing trouble. I hope so, but I am persuaded that we must grapple in a fundamental way with the interrelated problems of energy, inflation, and capital formation and, of course, unemployment, which is dependent uP' on all of the others. The next year is going to be a rather good one in terms of progress on all important fronts: production, employment, and inflation. It is the years beyond 1976 which need to give us concern.

Story at a Glance

Economic climate in '76 will make it hard for dealers to raise prices, they'll have to make it on volume, not higher prices... close to a 50% increase in housing starts.

The special interest of readers of this magazine is building materials. Here I think the outlook is excellent for the year ahead-again with fingers crossed regarding the longer range future.

Homebuilding.will not recover to its previous peak levels:costs are too high and mortgage rates, also a cost, are going to come down very little if at all. Measuring from this year's depressed level ofhousing starts, however, this will mean a very substantial advance. close to 5OVo. Business investment. which includes structures as well as equipment, typically lags a bit behind the business cycle and therefore should come on strongly by the middle of next year. I do not think however, that the climate of 1976 is one in which dealers will find it easy to raise prices. They will have. to make it on volume rather than hi$rer prices, but they should be able to do so.

A few words may be in order regarding the particular corner of the nation which is my special interest, Seattle and the State of Washington. This area, which was hit excessively hard by the mild recession of l97O-71, has been touched rather lightly by the more severe recession of 1974-75. Continuously from mid-1971 until the spring of this year, employment and business activity outpaced the national average, often by a substantial margin.

Forest products were hit hard (due to the national housing slump), but other industries held up well until the past few months.

We have had the impact of the Alaska pipeline construction as a special element of stimulation. We do sell our products in national markets, however-ships, railroad cars, machinery, aluminum, apparel, and aircraft, as well as forest and food products. Accordingly, we have been feeling the recession, somewhat belatedly, and I suspect that the turnaround will be a bit slow here by the same token.

In short, 1976 wtll be a year of improvement for this area, as for the nation, but it may be the first year since l97l in which we do not improve on the national trend.