October 14, 1980
The recession continues to be felt in the Twelfth District, as sluggish economic activity was reported throughout the region. Retail sales generally were down despite increased promotional activities. A variety of labor issues were of major interest during the past month. Strikes and the potential for strikes involving a substantial number of workers were reported throughout the district. Interest rates and unemployment both continue to be high and concern is expressed over this continuing phenomenon. Mortgage loan demand has fallen drastically in response to movements in interest rates. Commercial loan demand has also fallen but large corporate borrowing remains at its past rapid pace. The agricultural picture remains bright as good harvests and profits are anticipated. Industrial activity remains stable with little change in behavior expected.
The EMPLOYMENT picture in the region has centered on a variety of labor negotiations. Both the 71 day old Kennecott Copper strike and the strike by winery workers have ended. One mine workers' agreement has been reached while another is still in negotiations. The possibility of an aerospace workers' strike involving over 30,000 employees was diverted with the recent acceptance of a contract package. The unemployment situation is regarded as serious in many industries, but particularly in the automobile, steel and construction sectors. A notable exception to this situation is the electronics industry where demand for skilled workers is still high. A number of respondents feared that the unemployment picture for minorities may aggravate racial tensions.
AGRICULTURAL ACTIVITY is reported to be good throughout the Twelfth District. Excellent harvests are predicted for a variety of crops, with record harvests expected in some areas. The drought conditions in some areas of the country have created high prices for a number of crops, especially potatoes. The current heat wave in some parts of the district has created concern for the plum, peach, and nectarine harvests. The high price of cattle feed has brought on expectations of higher meat prices in the coming months. However, given reports of increases in herd size, some believe that increased supply will help to hold down meat prices next year.
Little change in the INDUSTRIAL sector was reported. Most businesses are continuing with past investment plans despite the rise in interest rates. In general, investment activity is low and inventories are reported to be below normal in a number of industries. This was created concern of higher prices when the recovery begins. For some industries, the slack in domestic business is made up by above normal foreign sales.
The recovery of RETAIL SALES continues to be slow. Although some areas are reporting an increase in sales brought about by seasonal factors, retail sales in most areas are down. The use of credit cards is still way below normal. While some specialty shops and more expensive stores are reporting increased sales, most stores are reporting sluggish sales and large inventories. A number of areas note a sharp rise in promotional activity. Whether this increase in advertising is in response to feelings of a shift in consumer spending moods or an attempt to decrease inventories is uncertain. Also present are reports of manufacturers offering discounts off list price.
The HOUSING market has been drastically hurt by the increase in interest rates. Mortgage rates of 14 percent and higher have severely reduced the demand for mortgage loans. The filing of permits for new construction has also been sharply curtailed. Property is staying on the market much longer than in the past few months. The lumber industry has been especially hard hit by the decrease in housing activity. Demand has been flat and unemployment in the sector is very high.
The outlook for FINANCIAL INSTITUTIONS is widely regarded as gloomy. Expectations of higher costs and declining markets are expressed. The rise in interest rates has brought about an outflow of deposits as savers are moving their funds to money market instruments. Rising rates have also had a dampening effect on the demand for loans by small borrowers. However, the demand for loans by large corporate borrowers does not appear to be affected by the increase in interest rates. This stable behavior is believed to be due to the fear of even higher rates in the future, deferment of long-term financing due to conditions in the bond market, and the relative narrowness of spreads between the prime and commercial paper rates. A great deal of concern was expressed over the coming of NOW accounts. Also discussed was the potential for problems created by a change in the pricing behavior of financial institutions brought on by movements towards deregulation. Additional concern was expressed about the increase in bankruptcies and loan losses.