March 14, 1979
The Western economy continues generally strong with a few signs of weakening. With a few exceptions, retail sales remain brisk throughout the West. The energy situation is said to be sparking sales of small cars. Residential construction and sales have slowed throughout the District, though non-residential construction continues strong in several areas. In District industries, lumber prices remain firm, strikes and freezes push up food prices and the skilled labor market remains tight. Only a handful of firms have reacted to the potential oil shortage by increasing their stockpiling capability. The consumer debt situation appears mixed, with continued strength reported by some banks and moderate weakening reported by others. Generally strong loan demand is said to account for the West Coast's adherence to an 11 3/4 percent prime and several banks expect their Eastern brethren to come back up to 11 3/4 very shortly.
Although patches of weakness are beginning to emerge, retail sales remain generally strong in the West. Consumer spending in California remains brisk and our directors explain this by large employment gains, the growing importance of the two-income family, Proposition 13 tax savings, large increases in home equity values and the associated availability of consumer credit. According to one director in Southern California, the opening of a new Neiman Marcus store has stimulated "the biggest buying spree in history all over Beverly Hills." Oregon's largest department store also indicates that sales remain strong, and reports from Washington point to continued briskness in all types of sales. In Idaho, a major grocery chain reported some weakening in retail sales and small business failures in shopping centers are reported on the increase. While sales are also weak in Utah, one observer expects an improvement once the severe winter weather breaks.
Auto sales, though reported slow in two areas (Salt Lake City and central California), appear to be strong in the rest of the District. Small cars are the star sellers and this is being attributed to the expectation of fuel shortages and price rises. In one area, the Ford Pinto is said to be sold out. A five-state distributor of foreign cars reports January sales up 89 percent and February sales up 20 percent over year-earlier levels.
Real estate activity has weakened throughout the District. In San Diego, both construction and sales of homes are down and the inventory of unsold homes is up from year-ago levels. In Salt Lake City, the January dollar value of residential construction is reported down 32% and non-residential construction down 18 percent from year-earlier levels. There is, however, still some strength in non-residential construction in California, Oregon and Washington. Both San Francisco and Seattle are in the midst of a downtown building boom, and Seattle's hotel capacity is expected to double in the next 3 years.
Developments in District industries generally suggest inflationary pressures. A combination of strong export demand and supply shortages (induced by government timber policy and a rail car shortage) have kept lumber prices up, despite the slowdown in housing. A farm worker strike in southern California has disrupted the harvest of lettuce and several other crops, and the strike is expected to soon move into the Salinas Valley, another major vegetable producing area. A freeze in Southern California caused considerable damage to the grapefruit crops. Reports of skilled labor shortages come in from Seattle and Salt Lake City. In the latter city, a new electronics firm was said to be using large bonuses to lure workers away from a competing firm.
Most of our directors appear not to have altered any investment or energy plans in light of recent changes in the world energy situation. The exceptions are: (1) a food distributor who, in order to insure an uninterrupted supply of diesel fuel, has leased additional storage capacity and begun stockpiling, (2) a dairy products distributor who is studying the potential for stockpiling, (3) Boeing which has adopted a vigorous conservation program and is shifting its plant's heating from oil to natural gas, and (4) a group of building contractors who report a three-fold increase in the number of calls concerning alternative sources of heating.
The consumer debt situation appears mixed with reports of continued growth, softening, and a shift in composition. A large California bank reported that consumer loans (both direct and indirect) and credit card debt rose during January and February, contrary to the normal seasonal downturn in these months. A smaller California bank reported consumer debt up 3 percent in January and 2 percent in February, in contrast to declines last year at this time. Reports from Seattle, Portland and San Diego also suggest continued growth in consumer debt. On the other hand, smaller banks in Washington, Oregon and Utah report some weakening in consumer lending. One Oregon bank noted a substantial change in the composition of its consumer loans. During the first 3 quarters of 1978, home equity loans accounted for 35 percent of this Bank's new consumer installment loans, but this share jumped to 95 percent in the fourth quarter and appears to have continued at a high level into 1979.
Loan demand is reported generally strong and is given as the major reason why West Coast banks have kept their prime rate at 11 3/4 percent. Most feel that the move to 11 112 percent by some large Eastern banks was premature and not supported by fundamentals. One large California bank expects these Eastern banks to be back up to 11 3/4 by late March, and that this will be followed later by a move to 12 percent across the country. A few banks also mentioned the high cost of funds as a major reason for not lowering either their prime rate or mortgage rate.