July 12, 1978
Consumer spending remains strong in the West, with autos displaying considerable briskness. For various reasons, several western industries anticipate capital spending to be less than that needed to meet future demand for their output. Housing demand appears to have been dampened somewhat by high interest rates, though a number of savings institutions do not have the funds to meet even this weaker mortgage demand.
Retail sales continue strong in the West. The consumer is still the strong factor in the California economy, according to one director. Comments from Washington, Oregon and Utah echoed this sentiment. Auto sales have been particularly brisk—enough to offset softness in the sales of other consumer goods in some areas. Sales of household durables, in particular, are said to be growing less rapidly than last year in southern California. There seems to be a growing feeling that retail sales will not continue their current strength for very much longer. One banker-director noted that consumer debt burdens are already too high to permit a continued expansion of debt-financed retail sales.
One large clothing manufacturer plans to cut back inventories in anticipation of slower retail sales in early 1979. A large distributor of domestic and foreign cars reports low inventories right now because they are selling more cars than they can get their hands on.
The economic recovery continues, according to Seattle University which is finding more demand for its graduates this year than last. Demand is particularly strong for bachelor's degrees in engineering and business and for MBA's. Demand is weak for graduates in liberal arts and education.
In the industrial sector of the West, a number of businesses note that their planned level of investment is insufficient to meet the expected demand for their industry's product. The president of Kaiser Aluminum noted that "investments have lagged in the industry due to inadequate returns in prior years and due to uncertainties caused by inflation". A large clothing manufacturer stated "the clothing industry is a low-wage business and the increase in the minimum wage is forcing us to look at outside sources (imports), rather than local investment and expansion". An oil producer pointed out that oil companies are concentrating their capital investments offshore and that no new-technology refineries had been built in the U.S. for many years. A gas producer supported this by noting that gas supply projects are difficult to finance because of the low return on investment capital. He felt that the rate of return was held artificially low by the regulatory lag and the lack of a well-defined energy policy.
The exception to this trend appears to be the banking industry. Several banker-directors noted that investment in new capacity has been sufficient to support continued expansion of that industry. However, one director did say "it is likely that investment in new facilities will moderate during the next eighteen months in line with our forecast of reduced growth in major loan and deposit categories".
There seems to be a general consensus that construction activity peaked in the fourth quarter of last year and that the demand for home ownership has been dampened by both high mortgage interest rates and uncertainty over whether the California property tax cuts promised by Proposition 13 will really be forthcoming. Building permits have declined since the first of the year in several counties of southern California and quite substantially in at least one case (47 percent in Orange County). However, there are still several areas (such as Oregon) where construction activity is quite strong.
Concern was expressed by a number of directors over high interest rates and a lack of funds for mortgage lending. Several S&L's have stopped making loans and at least one other has reduced the maximum amount of a loan. A Utah banker saw a lack of mortgage funds in both primary and secondary markets. One small bank noted that the new T-bill Certificates had stimulated very little activity. Consumer lending remains brisk, but the feeling seems to be that consumer debt burden may have reached its limit.