September 29, 1982
The Twelfth District economy continues to struggle with recession conditions. Consumer spending in August was down or flat in nominal terms relative to a year ago and does not appear to have responded as yet to recent declines in interest rates or lower Federal taxes. Commercial construction is joining residential construction as a depressed industry, although there are exceptions to this weak construction picture in certain areas of the District. The aerospace and electronics industries, although weak, continue to be reliant on military spending for their remaining strength. In the agricultural sector, the picture is highly varied, as bumper crops in certain commodities depress prices but boost processing activity, while other areas—such as potato processing—have suffered severe cutbacks in activity. The most notable developments in banking in the District are the widespread reports of loan delinquencies and foreclosures, and the rapid spread of "sweep" types of consumer deposit accounts. There appears to be little response of corporate investment or finance activity to the recent decline in short- and long-term interest rates.
Consumer Spending
The recent declines in interest rates have not sparked a recovery of
consumer spending in autos, housing or department store sales. All
four major department stores in the Los Angeles area, for example,
report nominal sales for August below that of a year ago. Although
there is increased optimism in the automobile and housing sectors,
reports of increases in activity are spotty. In Bakersfield,
California, for example, several dealerships report sales nearing
"profitable" levels, particularly for the larger size vehicles.
Throughout the District, however, continued high levels of
unemployment hamper consumers' spending enthusiasm. The State of
Washington, for example, has a persistent 12 percent unemployment
rate. Even in the normally busy harvest season in California's
Central Valley, unemployment rates are in the 12 to 17 percent
range. The conservative spending attitudes of the District are also
reflected in the relative strength of maintenance-type activities
such as automobile service and home improvement companies. Consumers
prefer to fix their old items rather than buy new ones.
Manufacturing and Mining
Twelfth District manufacturing and mining activity continues to be
depressed. The recent resurgence of gold prices has raised hopes of
increased activity in Nevada, the country's largest gold producing
state, but there has been little actual production response. Similar
hopes abound in Idaho's Silver Valley, but major mines such as the
Bunker Hill Mine continue to operate at low capacity, with 4,000 of
its 5,000 workers still laid off. The aerospace industry would be at
extremely depressed levels because of heavy order cancellation were
it not for military contracts. As it is, many plants in the industry
are closed or operating only 3 or 4 days per week. Boeing is
considering consolidating its 727 and 757 divisions, which would
reduce its workforce still further. In a recent survey of Twelfth
District Directors, little optimism was expressed that the recent
declines in interest rates and Federal taxes would spur corporate
sales or change corporate investment and inventory behavior in the
near term. Much of District industry apparently has taken a "wait
and see" attitude toward these developments.
Construction and Real Estate
The level of depression of the housing industry varies widely in the
District. In Idaho, housing starts in August were 45 percent below
the level of a year ago. In Los Angeles, a large overhang of unsold
homes reflects the continued weakness of that market. In stark
contrast to the general housing picture in the District, however,
Alaska reports an increase in single-family residential construction
permits of 47 percent over last year and a sevenfold increase in
multi-unit permits. Commercial construction is reported throughout
the District as "weakening" or "quiet," suggesting that this one
prop to the recession-weary construction industry is gradually
giving way.
Agriculture
Until there is a revival in the housing industry, the weakness in
the District's forest products industry can be expected to continue.
Overall, the lumber industry is operating at less than 70 percent of
capacity, supported in part by sales of logs to Far Eastern
customers. The picture in other agricultural products depends upon
the commodity. In Idaho, 2 potato processors recently closed plants,
laying off 1,200 workers. In the grain and grape markets, bumper
crops are severely depressing prices. These developments, coupled
with recent reductions in agricultural price supports, have severely
hampered growth in farm income. In contrast, California tomato
canners are working 24 hour shifts handling increased production.
Financial Institutions
The savings and loan industry continues to suffer in the Twelfth
District, although there is increased optimism that declining
interest rates will brighten the picture over ensuing quarters.
Consumer "sweep" type deposit accounts, whereby bank and savings and
loan association depositors can enjoy the features of money market
funds, have been widely introduced and are expected to be popular,
although costly to the financial institutions. In contrast, the
enthusiasm for the new 31 day accounts seems to be reserved. Loan
demand is very slack and a recent survey suggests that the declines
in long-term interest rates have been insufficient to prompt many
borrowers to convert short-term to long-term financing. The most
prominent development in the financial services area is the
startling increase in loan delinquencies and foreclosures. This
phenomenon is widespread,, but typified by the report of one bank
that delinquent loans had risen to 6 percent from one and one-half
percent a year ago. The overhang of seller-financed housing debt
adds to apprehension about these developments.