November 9, 1977
The Western economy is still growing, but with a few weak spots. Retail sales are mixed—strong in some places, sluggish in others. Inventories are generally at desired levels. The industrial picture is also mixed—many industries growing nicely but problems in pulp and paper, aerospace and steel. The current kingpin of the Western economy is construction, where single family building continues strong, but multiple unit and commercial appear even stronger. Demand continues strong for both construction and mortgage lending. While there is concern about disintermediation, little has been observed.
Retail sales appear uneven in the West. Some areas report strong sales, particularly in small cars, while others report sluggish sales. Third quarter retail sales were up 14.5 percent in Utah and 14.0 percent in Idaho over a year ago. Food sales in Seattle are a bit weak, due partly to the fact that the Boeing strike involves some 2 1/2 percent of the total Seattle work force. Also, a national clothing manufacturer located in the district reports mediocre sales. Inventories appear to be generally at desired levels.
The Western industrial picture is mixed. The forest products industry is generally in good health, except for the pulp and paper portion which was declared by one director to be a "disaster area." Aluminum orders have leveled off temporarily, but there is said to be fundamental growth in the demand for aluminum from the food and transportation sectors, so that output next year is expected to increase beyond a rather good 1977. Aerospace is hampered by strikes at both Boeing and Lockheed. Steel production in Oregon is said to be depressed by foreign imports, but overall, Oregon manufacturing continues strong as indicated in the rising employment figures. Two new food export ventures were noted in the Pacific Northwest. One is an operation which has begun to ship a planeload of live beef to Japan each week and the other is a project by a large Seattle food distributor to fly fresh meat and produce to a new supermarket in the Middle East.
Directors from Utah and Idaho claim not to be experiencing a pause in their economies. Most firms are said to be far out-stripping their level of output of the previous year. Significant employment gains in construction, mining and manufacturing are cited for Utah.
Construction appears to be the sector of strength in the Western economy. While average unemployment rates remain high, there is virtually no unemployment in construction. Some areas are actually reporting shortages of such skilled workers as electricians, carpenters and plumbers. However, there have been two shifts taking place, one is the diffusion of the construction boom from California to other Western states and the other is a shift from single family units to multiple units and non-residential construction.
Southern California reports an end to the lotteries and overnight sellouts of subdivisions, and developers are becoming a bit more cautious by putting up smaller blocks of houses at a time. Homes are remaining on the market longer and there is more price bargaining. While the level of single family construction continues high, the real growth in Southern California has been in commercial and industrial construction, which for the first 9 months of this year was up 110 percent over the same period last year. Even this rapid growth has apparently not kept pace with demand, for a shortage of prime, new office space is said to be developing. Construction of multiple family units is experiencing growth through California—100,400 multiple unit permits were taken out in September, the largest number since February.
In Utah, 1977 home building is estimated to be up 47 percent over last year. There, as in several other areas, shortages of such building materials as insulation, cement and sheetrock have been reported. In Oregon, residential construction continues strong and the previously sluggish non-residential sector took off in August at a level 300 percent higher than a year ago. Portland, in particular, is said to have experienced more rapid expansion of commercial construction in the past three months than ever before in history. One observer listed over $300 million worth of hotel, office and hospital projects currently underway in the Portland area.
Consistent with the strong pace of construction and real estate sales, the demand for both mortgage and construction is described as "high," "brisk" and "strong" all over the district, though some areas report a leveling off in demand. Reports from Southern California, in particular, note that while mortgage demand is still strong, it is less than in the first half of the year when real estate speculation was at its peak. It is explained that most of the pent-up demand for homes has run its course and consumers have become slightly more cautious about incurring additional debt.
A number of directors addressed the question of disintermediation, but only one felt he had observed any signs of the phenomenon having actually begun. While banks in smaller towns felt there would be no problem until 90-day Treasury bill rates hit 7 1/2 to 8 percent, large California banks felt 6 1/2 percent would be enough to trigger a mild degree of disintermediation. Still, even one of these larger bankers observed that a prolonged or extensive shortage of mortgage credit similar to 1969 and 1974 is not expected because financial institutions are more liquid now and interest rates are not expected to reach double-digit levels.