January 2, 1980
The economy of the Twelfth District does not display signs of a serious slowdown as yet, but definite weak areas are developing in housing and related industries and in industries associated with automobile manufacturing. Pre-Christmas retail sales are strong, but sales of consumer durables and large domestic automobiles are weak throughout the District. The credit market picture is mixed, but there are signs that loan demand has weakened in many areas, particularly housing. Employment and production remain stable and, in fact, continue to grow in the Northwest, but pessimism about future prospects is widespread.
The large department stores in the District report very good pre-holiday sales and in many parts of the region, such as the Northwest and the inter-mountain areas, there are tight supplies of retail space. Retail food sales are reported to be flat, however, and sales of appliances and other consumer durables are very weak. Sales of large domestic cars and trucks are reported off 25 percent and 40 percent, respectively, in areas of Oregon. In contrast, sales of compact foreign cars are running about 60 percent ahead of last year in Idaho. High rates for automobile flooring loans of up to 16 3/4 percent are badly hurting dealers with sluggish turnover.
Residential real estate activity has dropped off sharply in the District. Housing starts are down 60 to 70 percent in the Salt Lake City area from a year ago, for example, and declines of 30 percent are reported elsewhere. There are widespread indications that builders are dropping out of the market and some projects have been stopped in the middle of construction. In most areas of the District, the decline in activity is attributed to the price of mortgage funds rather than any change in the underlying demand for housing. In several states in the District, the problem is compounded by usury limits which have curtailed the supply of mortgage funds. There are no reports of falling housing prices.
In contrast to residential construction activity, commercial and industrial construction continues at a rapid pace throughout the District. However, there is widespread apprehension that the "pipeline" of previously contracted construction will run dry soon, bringing a sharp downturn to this industry as well.
The employment and industrial production picture remains quite stable in the District. A major aluminum manufacturer, for example, cites strong sales despite a fall-off in sales to the automobile industry. A major Southern California-based conglomerate reports increased sales at all but one of its 73 profit centers (the weak profit center sells steel to the automobile industry). In the Northwest, conditions continue to depict rapid growth, with new electronics plants locating in the region and the aerospace industry continuing to generate employment. Boeing, for example, reportedly will require an additional 6,000 people in the coming year.
The weakest industries in the area are those linked to the automobile industry or the residential construction industry. Thus, manufacturers of products and services for automobiles report weak sales, and the lumber milling industry has experienced some closing of smaller mills. Inventories throughout the District are reported to be low, suggesting that firms are managing the transition to the anticipated downturn better than they did in 1974/75.
Agricultural activity in the District has been quite strong and crops generally have been good, recovering from the drought conditions that prevailed in earlier years. Washington, for example, reports a record apple crop and strong foreign demand for its agricultural products. The growth in production of pork, chicken, and fresh vegetables is expected to reduce or stabilize the prices of these commodities. The strong performance of agriculture has generally permitted farmers to obtain the necessary credit for the upcoming seasons.
The reports received from the financial industry were mixed. Although in general, loan demand is reported to be down in all categories, a large California bank reports that its loan demand remains relatively strong. The weakest areas of loan demand are in the areas of residential mortgages, automobile loans and consumer installment credit. Residential mortgage loan applications are reported to be very light throughout the District and outstanding loan commitments have declined significantly, according to some bankers.
There is some evidence that it is the demand, rather than the supply of credit, which is the limiting factor in loan volumes—at least in those areas of the District without usury constraints on rates. California S&Ls, for example, are reported to have ample funds available for mortgage loans, stemming from the sharply dampening effect of high interest rates on the demand for these loans and the net savings inflows generated by MMCs and jumbo CDs. Strong November deposit inflows were also reported by a large commercial bank with contrary reports from several smaller banks. One manufacturer reports being approached by several banks seeking loan business, suggesting that commercial credit remains available to healthy borrowers.
Delinquencies in the consumer loan area are up sharply according to several banks. One bank has instituted a swing-shift of consumer credit examiners to identify and remedy delinquent accounts.
A survey of District directors indicates widespread sentiment that interest rates have peaked. However, most are not optimistic that rates will be able to fall substantially because of underlying inflationary factors in the economy such as continued energy price increases.