A Railroad's Outlook

By John C. Kenefick hesident

Union Pacific Railroad

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we expect things to look up in some ways in the first two quarters of 1981'- not with the glowing prosperity and hopefulness of the '50s. but we see signs that traffic patterns may start making the slow move out of the slump they've been in this year.

The economy still is going down, but at a slower rate than it has been. We look to a later part of l98l for any real improvement in the economic picture, bottoming out the fourth quarter this year or the first quarter of next.

Story at a Glance

President Reagan's tax relief pollcies will be critical to the economy . lumber hauling off severely . . . no real economic lmprovement until the latter part of '81.

Throughout this recession, certain of the commodities we move have taken a predictable beating while others, more immune to economic cycles, have helped sustain the railroad through hard times.

Sharply higher movements of coal and grain, which aren't as sensitive to the recession or to manufacturing cycles, were strong contributors to our railroad's accomplishing the best third quarter in its history-. Coupled with an intensified cost control program and the July 12, freight rate increase, the railroad was able to reverse its second quarter decline in earnings.

Although carloadings of some commodities have suffered major setbacks, UP's widely balanced traffic mix once again has helped maintain a healthy company through a difficult period.

Lumber has probably been hit the worst, housing starts being down so severelv.

While lumber lags, paper products traffic has held up fairly well. This is due partially to a first-half inventory build-up in anticipation of a paper workers' strike in the South and in Eastern Canada and because newspaper circulation is high. Furthermore, more magazine pages are being printed today as television advertising rates continue to climb.

Consumer durables carloadings are down and may not pick up fo-r another two and one-half to three vears because people in 1979 stocked up on autos, refrigerators, washers ancl dryers and did their home additions and r.emodeling, expecting future pnce lncreases.

Predictably, auto traffic has been down in this recession, but for us, the rate of decline has been nowhere near that which might be hypothesized lookins at domestic auto sales alone. The nrimber of imported cars that UP handles has moderated the domestic car downturn for us. We think new car hauling will be sluggish in the first half of 198 I because, while most American auto makers will be introducing smaller cars next year, the foreign manufacturers' penetration may not immediately change in 1981.

Generally speaking, chemical products are not terribly sensitive to eco-

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Monetary Policy and Pacific Northwest Construction

By John V. Russell Senior Economic Research Officer Seattle-First National Bank Seattle. Wa.

I AST year, b we thousht that the sluggishness of the recovery would be the most potentous economic event of 1981. We still think so. As of late October, in fact, the recover looks very slow; so slow, in fact, that there might well be virtual stagnation for a few more months. While this may be positive for economic performince in the long run, it means that l98l would be the third straight year of sub-par expansion.

The new monetary policy invoked in October 1979 has turned out to be different, indeed. The change was to use reserves as a short-run policy guide rather than interest rates. The effect on interest rates has been to increase their volatility substantiallv. Rates rose 100 basis boints immed'iately and continued up-until the prime was at 20Vo and mortgage commitment rates over 16%o.

Although the economy began to decline in February, the conhaction was not obvious in statistical reports until after a credit control prolram had been instituted in March.

Its impact was dramatic. Home and car sales plunged. Employment, production, and income did too. Real Gross National Product fell at a 9.6Vo annual rate, the steepest quarterly drop since World War iI.

Story at a Glance

Office and hotel construction strong in Pacillc Northwest for next two years. Industrial development will outpace the nation . . . resldential will be strong, if financial and landuse restrictions permlt.

Under the Fed's new policy, however, interest rates dropped rapidlv as demand for money fi:il. fnii un-doubtedly shortened the downturn, and the economy began showing signs of life in Augusl.

As economic activity rose, however. so did interest rates. Bv late October. short rates had climbed above long rates and the prime reached 14.5Vo. The construction industrv has once again been whiosawed bv the credit c-ycle. Nationally, housin! starts began to slip in 1978 but did not really plunge until mortgage commitnent rates hit 16%o in April of this year. Nonresidential construction displayed its typical lagging behavior, slipping in the second and third quarters of 1980.

With the decline in mortgage rates during the summer, housing revived with startling rapidity. Starts shot up from only 906 thousand in May (seasonally adjusted annual rate) to over 1.5 million in September; mortgage rates weren't far behind, hitting l4%o by October.

Although the manufacturing base of the Pacific Northwest-here taken (Please turn to page 90)