December 13, 1978
The health of the western economy remains robust, though there are a few signs of possible weakening. Retail sales continue strong throughout the District, and the inventory-to-sales ratio continues lean. While there are still shortages of some construction materials, the situation has improved with weakening real estate demand. Declines in orders for heavy equipment and men's clothing may foreshadow a weakening in economic activity, though no actual weakening is yet apparent, save in real estate. The money market certificates have apparently prevented savings outflows, and early reports indicate a substantial rolling over of these certificates.
Retail sales continue brisk throughout the District. Reports from Los Angeles note that some department store chains are experiencing sales close to 20 percent above last year's levels, with particular strength being seen in soft goods. Some observers attribute this to consumers spending the money they have saved through the property tax cut associated with Proposition 13. Southern California is also experiencing very strong demand for both cars and trucks.
The other side of the brisk sales coin is a continued lean inventory-to-sales ratio. In California, reports generally suggest that sales have been a bit more rapid than expected, leaving inventories a bit smaller than planned. In southern California, in particular, shortages of both trucks and some imported cars have been reported. In Washington, one banker noted that "sales are so brisk, there has been little opportunity for inventories to rise in relation to sales."
Indeed, some manufacturers have reported difficulty in keeping production rates high enough to meet demand. A large electronics manufacturer in Oregon reported orders running 32 percent above a year ago and noted that it was hard to keep up with this level of sales. One independent oil producer noted that inventories in the oil industry are considerably below a year ago.
The chief focus for actual shortages continues to be the construction industry though the supply situation has improved somewhat since last month. Cement and drywall materials were noted to be in particularly short supply. However, as construction activity slows down, demand for construction materials seems to be moving much more into balance with supply capacity. Thus, the previously reported shortages in insulation appear no longer to be a problem. A food processor did note that there were spot shortages of corrugated boxes, paper, aluminum foil, and vanilla beans but attributed them to strikes, poor harvests, and "the like which occur at intervals in the normal course of business." Still he cited inflation in materials costs as "incredible and universal."
While the general pace of the western economy continues strong, save real estate, there were two comments that were suggestive of a slowdown. First, a distributor of heavy equipment reported an unexpected slowdown in sales and an associated rise in inventories to a level 32 percent above a year ago. Action is being taken to reduce these inventories. Second, a large clothing manufacturer noted that orders for men's clothing are down and that men's clothing is traditionally the first to feel a slowdown.
There continues to be a slowing in real estate and construction activity in the West. Only in one area of southern California are housing sales and residential construction still reported very strong. One source of continued sales in both San Francisco and Los Angeles is the conversion of apartment complexes to condominiums. In most areas, homes are staying on the market much longer than earlier in the year with particular buyer resistance to homes in the $100,000 plus range.
Almost all reports suggest a reduced supply of funds available to the housing market. Three of the largest S&Ls in California have stopped making new loans and have restricted themselves to refinancing their own existing loans. A major California bank has not restricted funds to either builders or home buyers but has increased rates and tightened terms on mortgage and construction loans. Eleven percent is now the going prime mortgage rate. Another large California bank has increased rates to 11 1/4 percent and reduced maturities from 25 to 15 years. Several small builders in southern California are reported to have gone out of business due to this tightening. Construction activity has fallen off considerably in Idaho, where a 10-percent usury law restricts the flow of funds to housing.
There appears to be a general consensus in the District that the money market certificates have helped to prevent savings outflows from banks and S&Ls. There was some concern expressed that when the first generation of these certificates mature, savers may move their money into longer-term Government securities. However, one large California bank which is monitoring the situation closely, feels that reinvestment in new certificates will be substantial. Also, several large S&Ls in California have ceased offering new certificates, though they are rolling over existing certificates.