January 31, 1979
The Western economy continues to grow, but several weak spots have begun to develop. While department store sales continue strong, auto sales have declined in most areas of the District. A decline in residential construction is being partially offset by an increase in commercial construction. Labor shortages have emerged in a number of areas. Loan demand is weakening in some areas, though non-real estate loan demand appears to continue strong in many parts of the District.
While there is little information available on post-Christmas sales, the Christmas season itself was characterized by strong and sometimes unexpectedly strong growth in department store sales. One Oregon department store noted a 15-20 percent increase in December sales over last year. Merchants in two Washington counties reported record Christmas sales, some exceeding last year by 25 percent. While other areas reported similarly strong sales, at least one observer noted that merchants were approaching 1979 with caution and keeping a sharp eye on inventories.
Auto sales, on the other hand, have slowed considerably throughout the District. In Salt Lake City, dealers reported a significant drop in new car sales in December. In Oregon, dealers reported special resistance to "new models which are higher in price and smaller in appearance." Central Washington reports a slight falling off in auto sales and while booming Seattle reports continued excellent auto sales, this is composed of very strong demand for large cars and a weaker demand for small, particularly imported, cars.
Residential real estate activity seems to be weakening in virtually every part of the District. One of the largest banks in California has noticed a significant decline in applications for real estate loans over recent weeks—the first such decline observed by this bank during the current cycle. One California construction firm expects to see a 25 percent decline in housing starts in 1979. The current inventory of unsold homes in Utah is estimated to be 50 percent above a year ago. Real estate activity in central Oregon was said to be "slowing down rather markedly." One Idaho banker noted that the state's 10 percent usury law has put a stop to all his mortgage lending, save FHA and VA loans. Even in Seattle, which is still riding high on a Boeing-led boom, consumers are said to be resisting high mortgage interest rates and high home prices. The inventory of Seattle homes over $75,000 has increased markedly.
In sharp contrast to the decline in residential real estate activity is strong growth in commercial activity. In Seattle, the number of major downtown buildings announced or under construction is the greatest in history. A California construction company notes that the demand for space in industrial parks is high and expected to remain so throughout 1979. A report from central California also described commercial construction as being strong.
Labor shortages are appearing in various parts of the District. In southern California, an airplane was seen flying along the beach pulling a sign which pleaded "Hughes needs engineers." There are reportedly a hundred pages of help wanted ads in the Los Angeles Times. A major electronic firm which had been planning to relocate in Salt Lake has grown so tight as a result of new industry moving in record numbers, that business leaders have asked the Chamber of Commerce to cease promotional activities. While Boeing expects to increase its employment in Seattle by 10,000 over the next year, some observers wonder where those workers will come from. Still, even in booming Seattle, the unemployment of black youths continues to be a problem.
The financial picture is quite mixed in the District. Banks and savings and loans in Utah are said to be "heavily loaned up," given the strong loan demand coupled with no growth in consumer savings. In both Washington and central Oregon, however, loan demand is said to be dropping with the rising interest rates. A large California bank reported strong consumer, commercial and real estate loans through the first week in January. One Seattle banker who was very concerned about the continued expansion of consumer debt noted, "in my thirty years of observing consumer credit, I have never seen such a long, sustained period of expansion of consumer credit as we have seen over the past four years."
Part of the continued business loan demand appears to be due to firms borrowing short term in anticipation of a decline in long term rates. This shift in financing was reported by a natural gas firm, a wood-products firm, a university, a chain saw and power tool manufacturer and a truck manufacturer. Most Western bankers, however, do not feel this trend in significant.