October 11, 1978
The economic health of the West appears to be somewhat stronger than reported last month. Retail sales are up due both to a back-to-school surge and a Boeing-led boom in the state of Washington. Construction continues to expand in most parts of the District, and perhaps a bit too strongly in southern California. Several industries report increased export sales due to the decline of the dollar. Mortgage interest rates have begun to move up another notch in California and many observers feel that this will be the peak for this phase in the cycle.
Growth in retail sales is generally stronger than reported last month, due partly to a back-to-school surge and a population boom in the state of Washington. The largest department store chain in southern California reports that sales in the first two weeks of September are up 18 percent from year-earlier levels. Elsewhere in southern California, retail sales were reported to be growing at a rate of 10-15 percent over the past two months. Oregon also reports strong consumer spending. But Washington appears to be turning in the strongest performance with retail sales running 30 percent above a year ago. Much of this is due to a Boeing-led economic and population boom—car registrations are up 20 percent from a year ago. Domestic auto sales are reported strong all over the District and there is an actual shortage of new trucks in southern California. Imported auto sales are somewhat weaker.
Construction is still booming in many parts of the district and is felt by one director to be "too strong for a healthy industry" in southern California. Most of the strength there is in non-residential, but there are still reports of condominium developments selling out before the foundations are laid. One builder-director expressed serious concern about construction costs which he claimed to be advancing at 1 percent per month, due to declining worker productivity and rising input (especially land) costs. Furthermore, many labor contracts expire in spring and he fears substantial wage increases. Shortages of skilled workers, cement, air conditioning, electrical equipment, tile, wood and assorted other materials are reported in this southern-California construction boom. While construction elsewhere in the District remains generally strong, Idaho does report a slow-down due to a shortage of funds caused by interest rates bumping against the State's usury ceiling.
The effect of the dollar's decline on western industry is mixed. Naturally, a number of industries neither buy nor sell abroad and have thus been fairly well insulated from international currency movements. Others have been affected either on the input or output side, or both. The aluminum industry notes increased costs for imported raw materials but no stimulation of export sales. The forest products industry has noticed a significant rise in their sales abroad—much stronger than would normally be expected at this phase in their export cycle. A major chain saw company related that its foreign sales have increased nicely due to its increased competitiveness with its chief competition, which is located in Germany. An electronics firm also notes a strong increase in export sales. In the opposite direction, a director involved in the media related that foreign auto dealers in Washington are increasing their promotional activities to counter resistance to higher prices.
Most California S&Ls have raised their prime loan rate for residential mortgages from 9 3/4 to 10 percent. The former rate had been in effect since mid-August. This move was explained as an adaptation to the higher costs resulting from a significant transfer of funds from passbook savings into the higher-interest money market certificates. At this writing, banks had not joined in the increase, but there is every indication that they will. Our bank directors in California generally report stronger mortgage demand than they can satisfy, so something must give in the near future—either a weakening in demand or an increase in rates.
Elsewhere in the District a slight softening in mortgage demand is noted and often attributed to high mortgage rates. Most feel that mortgage rates have peaked, but there is a split between those who feel that rates will remain at their present, high plateau for some time, and those who see a decline before the end of the year. The former group argues that the high cost of money will keep rates up despite any weakening in mortgage demand. Some of this group also doubts that any significant weakening in demand will continue, because consumers continue to perceive home ownership as one of the best hedges against inflation.
Our non-bank directors were generally unperturbed by high money market rates. Both a large clothing manufacturer and a large forest products producer claimed to be net lenders in the money market and were thus positively affected by the hike in rates. Kaiser Aluminum noted that its investment plans would be changed only in reaction to a significant change in long-term rates. There were, however, several reports of efforts to reduce inventory levels as a result of high short-term rates. And one university noted that with the high rates coming in summer, which is their peak seasonal borrowing period, they had had to postpone several projects.