January 30, 1985
The recovery of the economy of the Twelfth District was continuing at year end. The pace of the recovery in November and December was considerably slower than in the first half of the year, but there did not seem to be any signs of increasing weakness or recession. Indeed, buoyed by declining interest rates, home purchases and purchases of consumer durables and automobiles appeared to be up slightly from a few months ago. Manufacturing employment continues to grow and in most states in the District, unemployment rates continue to fall. Agriculture remains weak as a result of depressed export demand and strong crop yields.
Consumer Spending
Consumer spending remains strong in most parts of the District,
although the rate of growth is well below that observed earlier in
the recovery. In Southern California, for example, retail sales in
November were up about 15 percent over their level in November 1983
but down from the 24 percent growth experienced between 1982 and
1983. Similarly, in Utah November sales were up 12 percent over a
year earlier. Preliminary data on Christmas retail sales volumes
have been mixed, with reports of only modest increases in Christmas
sales volumes over the 1983 level in the Intermountain states and
the Pacific Northwest. Somewhat stronger sales were reported in
California, but the preliminary picture is one of disappointing
volumes. This is substantiated further by sluggish growth in credit
card activity reported by banks.
Sales of new automobiles, however, were spurred by the sharp reductions in short-term interest rates that occurred toward the end of the year. In Oregon, for example, automobile sales early in the fourth quarter had grown by 24 percent in one month. Sales of other consumer durables—particularly consumer electronics items—remain healthy but sales growth over 1983 has been modest.
Manufacturing and Mining
Statistics on manufacturing employment show continued, but slowed,
growth of this sector. For the District as a whole, manufacturing
employment grew by about 2.5 percent in 1984, down from the 3.3
percent growth experienced in 1983. Although much of the District's
wood products industry remains depressed, some bright spots recently
have been observed. Plywood sales nationally set a new record and
producers of this product in the Pacific Northwest are enjoying
strong demand. Lumber producers were able to edge prices up
slightly, with western lumber orders for the first week of December
holding steady at what the industry considers "average" levels. The
weak dollar has increased competition from Canadian wood products
manufacturers, however, and plant closures in this industry
continued throughout the District.
Mining also remains weak as a result of low prices and stiff competition from foreign producers. Throughout the District, however, the weakness in the wood products and mining industries has been offset by growth in other manufacturing industries and the services sector. In states like Oregon and Idaho, these developments are almost perfectly offsetting and unemployment rates have remained quite steady over the last several months. In California, however, the strength of the aerospace and electrical equipment industries has led to continued, gradual declines in unemployment rates. In Santa Clara County, California, the center of the nation's high technology industry, the fourth quarter unemployment rate was less than 4 percent.
Construction and Real Estate
The decline in mortgage interest rates caused an abrupt resurgence
in new and used home sales in the fourth quarter. According to
industry sources, home sales growth in the West was the highest of
any region in the country. Weak areas remain, however, particularly
in the Northwest; home sales in Oregon, for example, fell slightly
early in the fourth quarter and the issuance of home construction
permits declined about 30 percent between 1983 and 1984.
Agriculture
The agricultural sector in the District continues to suffer the
effects of weak export demand and heavy debt burden. Prices for a
number of crops have dropped sharply. Avocado prices, for example,
range between 15 and 19 cents per pound, down from 80 cents per
pound in 1980. Low wine prices—due to stiff foreign competition—have resulted in the removal of vineyard plantings in California
after many years of steady expansion in this industry. It is
estimated that approximately 10 to 15 percent of the loans to
California farmers are nonperforming. The restructuring of the
financial affairs of farmers likely will result in a high percentage
of foreclosures and liquidations of farm properties.
Financial Institutions
Bank lending in the Twelfth District remained strong in December, as
it has been throughout the fourth quarter. Both total bank credit
(loans and investments) and total loans exceeded normal seasonal
growth rates. December growth was paced by rapid increases in
consumer lending (a 40 percent annual rate of growth). The strength
reflected both banks' aggressive lending practices and a surge in
consumer borrowing—despite slower than expected retail sales over
the holiday season. Recent declines in mortgage rates also may have
accounted for the upsurge in real estate lending (an 11 percent
annualized rate) in December, following weakness in this area
throughout the year. Business borrowing also expanded at a rapid
pace, rising at a twenty percent rate (annualized) for the month.
The recent decline in market rates has narrowed the spread between jumbo CD rates, money market fund yields, and MMDA rates, and altered banks' deposit flows and funding pattern. The lower rates appear to have led some banks and consumers to lock in longer term deposits, resulting in strong increases in both jumbo CDs and small denomination time deposits in December. The elimination of the differential between money funds and MMDA rates also resulted in renewed inflows into MMDAs; these deposits grew very rapidly in December. Most institutions, in the West expect the recent reduction in minimum balance requirements on MMDAs and SNOWs to have little effect on inflows into these accounts, although the reduced minimums may lead to more tiering of rates and fees.