November 10, 1981
Twelfth District respondents report that economic activity has slowed considerably over the past month. Consumer spending has dropped, particularly for durable goods. In the manufacturing and mining sectors, layoffs and production cutbacks have increased and spread to more industries. The slump in District homebuilding activity and home sales has deepened. Farmers are experiencing financial strain as a result of rising costs and declining commodity prices. Commercial and consumer loan demand has slowed due to the shelving of capital investment programs and reduced consumer spending. Mortgage lending activity at financial institutions is still extremely slow. Banks face intense competitive pressures from higher-interest bearing market instruments.
Consumer Spending
Respondents report a further slowdown in retail sales, with most of
the decline occurring in durables. Sales of new automobiles have
dropped sharply from the September pace and are running far below
the year-ago level. Respondents attribute the drop to the price-sensitivity of consumers and their uncertainty with regard to the
future. Now that dealer rebates have been eliminated and higher-priced 1982-models introduced, new cars sales have once again
slumped. Sales of lower-priced used cars in contrast are strong.
Purchases of other expensive durable goods, such as furniture and
appliances, also have slowed and are running below year-earlier
levels in real terms. Sales of apparel and other nondurable goods
are reported to be holding up better than durable goods. Retailers
generally expect a slow Christmas season.
Manufacturing and Mining
Respondents report further cutbacks in production and employment
among industries that already were depressed—such as construction,
lumber and metals. They trace this growing weakness to the deepening
slump in the homebuilding, automobile and appliance industries which
comprise the major national markets for these regional products.
Western lumber production continues to drop and is currently running
about 40 percent below the 1978-peak. Copper producers in Arizona
and Utah are cutting production. The aerospace equipment
manufacturing industry has been cutting employment as a result of a
further slowdown in commercial orders. New orders for jet transports
have slowed to a trickle due to the poor financial performance of
the nation's airlines. Semiconductor firms in California are
planning extended shutdowns during the Thanksgiving and Christmas
holiday periods to reduce excess inventories accumulated as a result
of cutbacks in business equipment spending. Industries that had been
expanding—for example, the paper industry—have begun to cut back
production, indicating that weakness in demand is spreading.
Real Estate
Respondents report a further slowdown in homebuilding activity and
home sales, from already severely-depressed levels. They cite
numerous indications of the financial distress being experienced by
builders and realtors as a result of the depressed residential
market. These include a growing number of incomplete projects,
foreclosures and business failures. Homes are not moving, despite
reduction in prices and the "buying down" of market mortgage rates
by builders. As a result, a growing number of builders are resorting
to auctioning to dispose of property. Nonresidential construction
also is reported to be slowing as firms shelve planned capital
investment programs.
Agriculture
Twelfth District farmers and ranchers are finding it difficult to
keep up with inflation. Harvests of nearly all major crops are up
sharply from 1980-levels. But prices for a wide range of farm
products—including cattle, wheat, cotton, nuts and certain fruits
and vegetables—have been declining and in some cases are running
below year-ago levels. Faced with higher than year-earlier
production and interest costs and lower commodity prices, farmers
are experiencing a severe cost-price squeeze. Bountiful harvests and
declining export demand—resulting from weakness in overseas
economies and the strength of the dollar—have been responsible for
the erosion in prices for some products. In the case of fruits and
vegetables, fears about possible Medfly infestation continue to
reduce demand and prices for California products.
Financial Institutions
Bankers report a slowdown in overall loan growth in October.
Commercial and industrial loan demand for capital spending purposes
has been decreasing due to growing excess capacity. Real estate
borrowing has picked up slightly but is still very low compared with
previous years. Consumer borrowing from banks is reported to be
extremely slow due to tight credit terms and cautious consumer
buying patterns. The money market mutual funds continue to siphon
off bank deposits. A few large banks have been attempting to retain
deposits by offering cash management services to large commercial
customers. But these innovations are not yet a widespread phenomenon
among various sized banks and customer groups. The All Savers
Certificate is believed to have merely transferred low-cost savings
balances to higher-cost instruments within the same institutions.