May 13, 1981
The strong performance of the economy in the first quarter surprised many in the Twelfth District. Previously, gloomy expectations had been reported for economic conditions. Presently, most are expressing slightly more optimistic forecasts for economic conditions for the rest of the year. Inventory positions are reported to be low as firms are trying to cope with the high cost of financing. Housing related industries are still depressed and with mortgage rates in the 16 percent range little change is anticipated. Agriculture continues strong in the region and a water shortage no longer appears to be a serious problem. Financial institutions are dealing with volatile interest rates by making greater use of variable rate loans. Intense lobbying efforts are underway against recent rulings that remove "due-on-sale" clauses in mortgage contracts. The unemployment picture remains unchanged.
CONSUMER SPENDING, after a surprisingly strong first quarter, is reported to be weakening somewhat in the Twelfth District. Automobile sales rose briskly in response to the manufacturers' rebate program during February and March. However, sales are said to have substantially slowed down during April. Retail sales in general are reported to have been strong in April and many expect continued strength in the upcoming months. There is some concern that the recent rise in interest rates may lessen durable sales.
INVENTORY positions are reported to be very low compared to sales. Firms are still cautious to expand, given the high level of economic uncertainty and the high cost of financing. There is some evidence to suggest that automobile manufacturers are replenishing inventories as a result of the depletion of stocks due to strong sales during the first quarter. Some indicate that the inventory position should benefit the economic recovery as any pickup in sales will require a significant increase in inventories.
HOUSING related industries remain depressed. With mortgage rates in the 16 percent range little optimism is being expressed. There remains a large inventory of unsold homes and little new home construction is under way. The lumber industry remains in a slump and layoffs and shutdowns continue. The industry is also being hurt by a weakening in the export market. Concern is being expressed that many builders and construction labor that is being forced out of the market at this time will not return to the housing industry when it recovers.
AGRICULTURE in the district remains strong. Unseasonably heavy rains have raised the water table and the snow pack in the mountains and so reduced concern over a potential water crisis. The fruit fly still remains a potential major problem in parts of the district. Agricultural interests are on guard against any possible outbreak and have proposed the use of widespread spraying if the policies undertaken in the past months do not appear to have worked. The Texas quarantine of California produce has been rescinded as the fruit fly has not spread to the major agricultural areas. Agricultural sales for California totaled over $14 billion for 1980 according to recently released figures. Projections are for an ample supply of agricultural products so that consumers will be seeing relatively low prices.
FINANCIAL INSTITUTIONS are trying to cope with volatile interest rates. Almost all loans that are being made are on a variable basis.
Institutions are trying to reduce the maturity of their loan portfolios. A major concern in a number of areas are rulings that remove "due-on-sale" clauses in mortgage contracts. Some contend that these rulings will hurt both financial institutions and the housing market. Some California Savings and Loan Associations are changing their charters so as to circumvent a ruling in the state prohibiting "due-on-sale" clauses. The recent authorization by the Federal Home Loan Bank Board of a new adjustable rate mortgage instrument which allows for greater variability in rate has received a favorable response from Savings and Loan Associations.
The UNEMPLOYMENT situation in the District remains mostly unchanged. The unemployment rate in a number of areas is still at very high levels. Fewer jobs are available and any news of possible hirings brings a flood of applicants. The electronics and computer industries continue to thrive and are constantly looking for skilled help. However, in general reports are not very optimistic for employment possibilities for the rest of the year.