October 11, 1977
The Twelfth District economy can be generally characterized as healthy and growing, though with several weak spots that bear watching. Retail sales continue strong in all urban areas of the district, though depressed farm incomes have led to depressed retail sales and economic activity in a number of rural areas. Previously hot housing markets have cooled considerably. Most District industries maintain moderate to rapid growth and desired levels of inventories. Exceptions are metals and agriculture, each of which faces its own unique problems. Consumer credit continues to expand at a rapid pace and the rise in short term rates has raised fears of disintermediation.
Retail sales in all urban parts of the District continue strong. Major department stores in southern California report August sales up 12 percent and September sales up 11 percent over a year ago. A report from southwest Washington notes the unusual phenomenon that (unadjusted) August retail receipts topped those of last December. This pattern does not hold true in rural areas where falling farm incomes and farmworker layoffs have weakened all types of spending in the local rural economy.
One banker from southern California notes with relief that the extreme pressures of the recent past are moderating in the housing market. Whereas housing prices were rising at a 30 percent annual rate a year ago, today the increase is down around 10 percent. The resale of single family dwellings is said to be moving from a sellers to a buyers market in some areas, with "for sale" signs remaining up much longer today than only a few months ago. There are exceptions to this in such areas as southwest Washington where the housing market had been rather quiet and has recently begun to heat up.
Most District industries appear to be growing at a healthy rate. In the aluminum sector, output remains high and demand is expected to remain strong through 1978. The aerospace industry is operating at high levels of output. Demand should continue strong since a large number of 20-year-old jets are due for replacement. In the forest products industry, pulp and paper markets are rather soft, though the housing-led lumber market is very strong. The pace of construction activity continues at record levels in many areas of the west.
Other positive reports come from a large electronics firm (the largest employer in Oregon) whose sales are running 27 percent above a year ago, a national power tool and chain saw producer who is currently recording record profits and expects future demand to be "very, very strong," and a truck and a truck lift firm who both report strong growth.
Sectors currently experiencing problems include metals, higher education and agriculture. Copper prices have fallen so low that our major producer of copper has begun laying off workers. Steel producers report difficult times as the steel market is characterized by widespread discounting.
While isolated producers of a few specialty crops are maintaining reasonable income profiles, farm income is generally depressed in the west. For example, even though cotton prices are at historic highs, they still fall short of production costs. Production costs in California have risen much more rapidly than elsewhere due to the prolonged drought. Wells have had to be deepened to accommodate the falling water table, and each 10 percent increase in depth results in a 10 percent increase in pumping costs, on top of which farmers have had to add rapidly rising electricity rates. One banker in the San Joaquin Valley notes that even with normal rains it will take a number of years to replenish both reservoirs and underground water. The bright spot on the farm scene is that the drought has ended in both the Pacific Northwest and Utah.
Inventories are reported to be at desired levels in aerospace, electronics, trucks and lift trucks, chain saws and power tools, a planned higher than normal in aluminum and lower than desired in clothing.
The rapid growth in consumer lending experienced in the Twelfth District during the first half of the year (an annually adjusted 48 percent between January and July) appears to continue, though at a slightly more moderate pace. Growth continues especially in the big ticket items such as autos and mobile homes, and in household appliances and furnishings. While most banks felt that consumer loan demand would continue strong, one Utah bank saw an increase in repossessions as indicating consumers may be reaching the limit of their ability to repay.
A number of people expressed fears of disintermediation, given the current high and rising level of short term rates, and one banker reported already having observed limited disintermediation at his own bank. Concern was expressed over the implications of this for thrift institutions and ultimately the housing industry.