January 20, 1984
In the Twelfth District the expansion is continuing at a rapid pace. Consumer spending during the Christmas and post-holiday season has been exceptionally strong, both at retail stores and automobile dealerships. Western homebuilding activity in November regained 1983's August peak and nonresidential construction spending has been rising as well. In the manufacturing sector, employment gains have been widespread and especially strong in such defense and capital goods industries as electronic equipment and missiles and space vehicles. Agricultural prospects are improving. Adjustable rate mortgages are gaining increased borrower acceptance and helping to sustain housing. Consumer loans are growing rapidly due to consumers' increased creditworthiness and optimism.
Consumer Spending
Consumer spending was extremely strong throughout the district
during the Christmas holiday season, and buying apparently has
remained strong in the post- holiday period, after allowance for the
normal seasonal slowdown. The strength has been apparent both at
retail stores and automobile dealerships. Major department stores in
Southern California, for example, experienced an average 16 percent
gain in sales in December over a year earlier. In Arizona, sales
were up by a similar percentage. Even in Oregon, where the overall
economic recovery has been lagging and weather was particularly
severe, major retailers experienced year-to-year sales gains in
December ranging from 12 to 18 percent. Stores have been discounting
merchandise heavily and thus have been moving a large volume to
attain these sales increases. In fact, due to their depleted
inventories and optimism with regard to future sales, retailers are
revising their inventory plans upward for the first half of 1984—although their attitude with regard to inventory building still has
to be described as cautious. To finance their heavy expenditures
consumers have been sharply increasing their installment debt.
Nevertheless, financial institutions consider consumers' increased
willingness to borrow as a positive factor affecting spending, since
consumers do not appear to be overextended and delinquency rates
actually are declining.
Manufacturing and Mining
Manufacturing employment has been rising rapidly throughout most of
the district states, except in Oregon where the lumber industry has
been cutting payrolls since August. Gains have been especially
strong in the electronic equipment industry—which has been
experiencing rising defense, consumer and business demand—and in
the missiles and space vehicle category. California has been the
location for most of this increased high-technology employment, but
Arizona and Utah also have been experiencing rapid gains. The West's
other capital goods industries—including those that manufacture
non-electrical machinery, trucks and aircraft—also are
experiencing a pickup in orders. In Washington, orders for
commercial transport planes have risen so sharply since mid 1983
that aircraft employment is expected to stabilize or perhaps rise
moderately in 1984 after falling by about 9,000 during each of the
two preceding years. With the notable exception of the Pacific
Northwest aluminum industry, employment in the West's energy and
metal mining and processing industries has stabilized but not yet
begun to rise significantly. The copper, coal and oil industries
continue to suffer from weak prices and excess worldwide supplies.
Overall, respondents report that manufacturers intend to add workers
to their payrolls very cautiously in 1984 so as to realize continued
rapid productivity growth and hold down the increase in unit labor
costs.
Construction and Real Estate
Homebuilding activity has rebounded more strongly in the West than
it has nationally. For example, Western housing starts in November
regained the 1983-peak reached in August. Permits issued for new
dwelling units in the region also rose more than nationally,
suggesting that Western homebuilding activity in coming months will
remain relatively strong. Sales also are reported to be holding up
well, although housing prices are rising. Respondents attribute this
strong housing market to buyers' increased acceptance of the newer
adjustable rate mortgage packages which offer initial rates
substantially below those of the current fixed-rate mortgages.
Nonresidential construction spending also is picking up. The upsurge
in retail sales is encouraging modernization and construction of
retail stores. The high-tech firms, especially electronic
manufacturers, are building new plants. The decline in office
vacancy rates, and the availability of pension fund and insurance
company financing, are encouraging developers to plan and start
construction of new office buildings.
Agriculture
The agricultural sector is currently in the midst of its normal
seasonal slowdown. Crop farmers throughout the district are
optimistic about prospects for 1984, however. Grain farmers expect
to benefit from the higher prices for wheat and cotton resulting
from the Midwestern drought. California and Pacific Northwest
farmers also expect higher prices and stronger demand for their
citrus and other produce because of the freeze in Florida and Texas.
They also are encouraged by the possibility that energy, interest
and other production costs may only increase moderately. Farmers are
concerned, however, that agricultural exports could fall again in
1984 due to the high foreign exchange value of the dollar and
foreign imposition of trade barriers. Livestock producers
experienced a decline in net income last year and current conditions
are not favorable. The drought-induced higher feed costs are forcing
ranchers to slaughter their herds earlier than usual, increasing the
availability of meat and reducing prices below year-ago levels.
Financial Institutions
The past few months have seen a significant increase in adjustable
rate mortgages (ARMs) in most parts of the Twelfth District.
Financial institutions have overcome borrower hesitancy with
aggressive pricing and the inclusion of limits on potential
increases in interest costs. Some are offering ARMs at differentials
of up to 200 basis points under fixed rate mortgages, along with a
below market rate of less than 10 percent for the first six months.
Such pricing has opened up the market to those unable to qualify at
the higher rates on fixed rate mortgages. The inclusion of caps on
any future upward movement in rates also has contributed to buyer
acceptance of ARMs, providing buyers at least a partial reduction in
risk. The consumer meanwhile is showing signs of continued financial
health, as evidenced by a sharp increase in consumer loans. In
December, the amount of consumer loans outstanding (n.s.a.) at
Twelfth District banks rose at an annual rate of 37 percent. The
sharp increase in December boosted the annual increase in banks'
consumer loans outstanding to 8 percent.