July 1, 1983
The recovery in Twelfth District economic activity is gaining momentum, extending to a greater number of industries. Retail sales at department stares have been rising at an accelerated pace recently, while the recovery in Western homebuilding and sales activity has been even stronger than the upturn nationally. In the manufacturing and mining sectors, employment gains are becoming more widespread. Moreover, although the capital goods industries are not yet expanding their payrolls, employment has stabilized. The net inflow of funds into MMDAs at District banks has slowed but still remains substantial. Banks have been investing most of their excess funds in short-term Treasury securities since business and consumer loan demand remains weak despite promotional efforts.
Consumer Spending
Respondents report that consumers are imbued with a renewed sense of
confidence and that retail sales have been increasing widely
throughout the Twelfth District. Major department store chains in
Southern California reported that sales rose sharply in May and ran
nearly 13 percent above the year-earlier level, representing a solid
gain in real terms. The only weakness is occurring in Utah where
flooding, attributable to a record spring snow melt, is adversely
affecting shopping. Competition for sales is reported to be
extremely intense with department stores engaged in heavy
discounting of list prices. These promotional efforts are being
successful, however, and seasonal inventory is moving well. Sales of
durable goods, severely depressed during the recession, are rising
even faster than nondurables. In particular, the upturn in home
sales is helping to spur sales of household goods, including
furniture, appliances, and other big ticket items. Interest rate
concessions by manufacturers have stimulated sales of automobiles.
Retail credit delinquencies are returning to pre-recession levels.
Manufacturing and Mining
The recovery in Twelfth District manufacturing activity is becoming
broader based. Until recently, gains in employment and prices were
confined mainly to the important lumber industry which benefited
early in the recovery from the pickup in national homebuilding
activity. But in the past two months, employment also has begun to
rise in a number of other important regional industries including
primary metals, chemicals, apparel and food processing. Recent labor
agreements in the aluminum and copper industries have removed the
threat of strikes. The pickup in orders for those metals therefore
is attributable to a fundamental increase in consumption by the
automobile, appliance, container and housing industries, rather than
to strike hedge buying. The West's major capital goods producing
industries—including those that manufacture machinery, electronic
equipment, trucks, aircraft and rail cars—have not yet experienced
an overall pickup in orders. Although the defense and consumer
markets for some of those products is growing, business demand for
capital goods remains weak. Nevertheless, except for aircraft, where
low commercial airline orders are still causing cutbacks, employment
in most of those industries has stabilized.
Construction and Real Estate
The West is experiencing an even stronger recovery in homebuilding
and sales activity than the nation as a whole. Housing starts in the
West currently are running at double the level of a year ago and
permit activity points to still further gains in the months ahead.
Sales of new homes throughout the District apparently are rising at
a strong enough pace to prevent an excess accumulation of unsold
inventory. Sales of lower-priced homes have picked up especially
rapidly. But in the Los Angeles area, single-family residences in
the $200,000-$300,000 price range also are selling well. A large
portion of the new homes are being financed through subsidized
FHA/VA or state government mortgages. Although nonresidential
construction activity remains below the year-ago level, respondents
report a pickup in certain geographical areas for such non-office
projects as shopping malls, hotels and hospitals. Moreover, the
rising value of nonresidential construction permits issued suggests
that spending will increase in the months ahead, provided interest
rates do not rise sharply.
Agriculture
The return of clear weather in the past two months has permitted
California farmers to plant lettuce, tomatoes, onions and other
vegetable crops, which had been delayed by flooding. As a result,
vegetable prices have begun to moderate after rising sharply earlier
this year. Similarly, fruit prices also are coming down. Prices for
fruits and vegetables are still well above levels of a year ago,
however, and California farmers are expected to experience a year-
to-year increase in net income from those products. California
farmers also are expected to benefit from the Federal payment-in-
kind (PIK) program. In fact, cotton prices have been rising sharply
recently and production costs for grains are down generally.
Elsewhere throughout the District, smaller gains in net farm income
are anticipated. One potential threat is the record snowpack which
could damage California agriculture this summer.
Financial Institutions
The net flow of funds into MMDAs at Twelfth District banks has
fallen off considerably in recent weeks in keeping with the national
pattern, partly due to interest rate competition from thrifts.
Still, the inflows represent a significant source of funds, which
has allowed banks to reduce their reliance on purchased funds,
especially large CD's, and to actively promote both business and
consumer loan products. Business loan demand remains flat to weak,
however. Thus, most institutions are heavily promoting their
consumer loan products—i.e., auto loans, installment loans, and
credit card plans—to stimulate consumers' demand for shorter-term
or variable rate credit. Aggressive advertising campaigns and lower
loan rates are the most common efforts being employed by banks to
attract borrowers. Despite these efforts, consumer loan growth has
not accelerated rapidly because of competition from captive finance
companies offering discount loan rates and increasing competition
from other nonbank lenders. Since the volume of banks' mortgage
loans outstanding has not been growing, these institutions have been
investing excess funds in short-term U.S. government securities.