September 20, 1983
The Twelfth District economic recovery is continuing, but at a slower pace, due largely to the decline in residential construction and its ripple effects on such key industries as lumber. Apart from a shortage-induced decline in automobile sales, consumer spending remains strong, with department stores experiencing a widening year- to-year gain in sales in August. Western homebuilding activity has been falling off moderately since June, however, and an even sharper decline in home sales suggests a further slowdown in starts in coming months. In the manufacturing sector, overall employment growth has clearly slowed. Some capital goods industries—especially electronic equipment—are experiencing increased order inflow, however. Consumer lending at Twelfth District banks has been especially strong due mainly to increased consumer spending but also due to banks' promotional efforts. Applications for mortgage loans have dropped dramatically.
Consumer Spending
Respondents throughout the Twelfth District report that retail sales
continue to rise at department stores and other outlets and that
these stores experienced a widening year-to-year margin of gain in
sales in August. Major department store chains in Southern
California, for example, report that sales in August ran nearly 16
percent above the year-earlier level. Double-digit increases also
were recorded at major stores elsewhere. Retail outlets not only
experienced strong sales of apparel and other back-to-school
necessities but more costly personal luxury items and home
furnishings. Respondents attribute these buoyant spending patterns
mainly to pent-up demand, rising consumer incomes, and increased job
security. Retailers have been increasing their inventory, but due to
high real interest rates have held the buildup below the normal
relationship to sales. Automobile sales declined in August, but
respondents attributed the slowdown to a shortage of 1983-models
rather than to a decline in demand.
Manufacturing and Mining
Growth in both total employment and manufacturing employment has
slowed recently. In some states—notably, California and Oregon—unemployment rates actually have risen. Part of the slowdown has
been due to renewed weakness in residential construction activity
and its adverse effects on the important lumber industry. Since
June, prices for some key homebuilding lumber products have fallen
as much as 25 percent, and lumber mills have been cutting
production. Fortunately, the pulp and paper segment of the forest
products industry has continued to experience further improvement in
orders and employment. In the metal mining and manufacturing
sectors, the Pacific Northwest aluminum industry has been raising
its capacity utilization rate, but the copper industry in the
Intermountain states has remained depressed as prices have continued
to fall despite a labor strike against the nation's second largest
producer. The West's major capital goods producing industries—including those that manufacture machinery, electronic equipment,
trucks and aircraft—are experiencing a pickup in orders. Not only
has consumer and defense demand for these goods increased, but
business demand has risen, especially for electronic equipment. In
the case of commercial transport planes increased orders have not
translated into increased employment, however, due to an even
greater increase in shipments and consequent decline in unfilled
orders. Employment has stabilized but not yet increased in such
energy industries as coal mining and oil production.
Construction and Real Estate
Although housing starts in the West have held up relatively well
compared with the national pattern in recent months, the rise in
mortgage interest rates has had a dampening effect on starts since
June. Moreover, sales of new and older homes have dropped touch more
dramatically, suggesting that the pace of homebuilding will fall
further in the months ahead. In fact, in July, the West experienced
a 14 percent decline in sales of new homes, and respondents report
that sales slowed further in August. One large real estate firm in
Southern California reports that it is doing 40 percent less
business than it was doing two months ago. Another reports that
sales of new and existing homes have fallen 25 percent in the last
60 days. As a result, the inventory of unsold homes has risen
sharply. The climb in mortgage rates has disqualified large numbers
of buyers in the high-priced California market. Builders in Southern
California report that cancellations of new tract-home sales are
running at a 40-50 percent rate in August, twice the cancellation
rate earlier in the year when FHA rates were in the 12 percent
range. Some builders who had previously committed to a "buy-down"
arrangement to keep effective interest rates affordable are now
facing a large number of discount points, thus shutting off this
avenue of financing in the future. Most respondents feel that
housing has clearly passed its cyclical peak for this year and that
the recent drop in FHA and VA rates from 13.5 to 13 percent will
only slow the rate of decline. In the nonresidential construction
sector, activity continues to lag behind the year-earlier pace.
Vacancy rates are declining for office and other commercial
buildings, but no significant increase in construction is expected
until 1984.
Agriculture
Unseasonable rains in Southern California caused damage to certain
farm products in August, including alfalfa hay, cotton, tomatoes,
grapes and almonds Nevertheless, net farm income is expected to be
up in most District states this year, partly because the farm sector
is expected to benefit greatly from the combined effects of the
Federal payment-in-kind (PIK) program and the Midwestern drought in
boosting prices for cotton and grains. The positive effects of the
PIK program for California and Arizona cotton growers will be
reduced by their need to put part of their 1983 crop on loan with
the Commodity Credit Corporation, reducing the amount available for
sale at higher prices. Nevertheless, these farmers still will
benefit significantly from the program, while farmers in Washington,
Oregon and Idaho will benefit in general from higher grain prices.
Livestock producers, on the other hand, will suffer rising feed
costs and a further drop in already weak cattle prices.
Financial Institutions
The volume of consumer loans outstanding at large Twelfth District
banks has grown at an annual rate of 12 percent over the past three
months. Increased consumer spending resulting from rising real
incomes, employment and confidence has been largely responsible for
the increased borrowing. Households' purchasing power also has been
enhanced by the effects of the stock market rally in increasing
wealth. In addition, banks are actively promoting consumer lending,
although this is taking place through new loan products and
publicity about availability rather than by lowering rates
significantly to meet competition from captive finance companies.
Mortgage lending continued to increase through August on the basis
of previous commitments, but it is likely to deteriorate in coming
months as a result of higher rates. Bankers report a sharp drop in
applications for new mortgage loans. Commercial lending activity
remains very weak, partly because corporations are using increased
profits to pay down short-term debt.