May 10, 1978
The western economy continues strong, though a few trouble spots are beginning to emerge. While retail sales and industrial production continue to grow, two industries are at or near full capacity. Inflation expectations of our Directors average about a point above the most recent Board of Governors' forecast. And while mortgage loan demand continues strong even in the fact of rising rates, some thrifts worry about running out of money.
Retail sales continue strong in the West. The largest department store chain in the Los Angeles area reports sales to be up considerably during the past month. An expected weakness in sales around income tax time was reported in one area. Auto sales were said to be booming in Seattle. Auto sales and auto dealer profits were reported brisk in Utah. Both auto and truck sales were reported strong in Oregon.
Two western industries are reported to be at full capacity. The rolled aluminum industry (which represents 50 percent of all U. S. aluminum production) is running at capacity, and shortages accompanied by higher prices are expected over the next few years. Reports from the forest products industry indicate that full capacity has either been reached or will be by mid-summer.
Our Directors expect inflation over this year to be about 8 percent, with individual forecasts ranging from 7 to 11 percent. Most see increases in the price of supplies to their firms and consequently increases in their product prices. One university reported an average 8 to 10 percent increase in faculty and staff compensation, and an associated 9 to 10 percent tuition hike in the fall. Reports from both agriculture and aluminum industry observers noted sharp increases in energy prices. A forest products representative argued that environmental pressures and government timber policy were generating higher raw material costs for his industry.
Western cattlemen are enjoying the best prices in five years, but most are operating with sharply smaller herds so that total revenue gains are not yet sufficient to offset the losses of the past few years. Even though many crop prices are still considered very low, this does not appear to have dampened spring planting intentions.
Demand for housing in the West remains generally strong despite the recent increase of home mortgage rates to 10 percent by some California S&Ls. In the Seattle area it is reported that a "vigorous housing market is being fueled by young adults at the family forming age." In southwest Washington, the housing demand is so strong that "people no longer ask what rates are being charged for home loans." In northern California there are still overnight queues when moderately priced housing tracts open up for sale. However, in southern California, housing prices have begun to stabilize and the issuance of permits is now running under a year ago. Only in Anchorage, Alaska is there said to be any overbuilding—apartment vacancies there are currently running about 15 percent.
Real estate loan demand continues brisk in most parts of the District, despite rising mortgage rates. Many thrifts, as well as some banks, are reported to be experiencing net savings outflows. Several Oregon S&Ls are said to be "very close to being out of money." Another S&L claimed to be accepting only 3 out of each 5 requests for mortgages and all mortgage requests granted were to dual-income families.
Business loan demand in the West has been growing more rapidly than the seasonal norm of the past few years. Only a small portion of this, however, is being used for purchase of plant and equipment. Inventory financing, restructuring of corporate debt and smoothing out internal cash flow problems were cited as major uses for these funds. Large national corporations are still not a part of business loan demand as they are reported to be using the commercial paper market, long-term bonds and Eurodollars as sources of funds. Local firms and some mid-sized national firms are said to be doing most of the borrowing.