January 27, 1982
The Twelfth District economy appears to have weakened further in the past month. A late burst of spending pushed December retail sales moderately ahead of the year-ago level in nominal terms, but sales still failed to keep up with inflation. Moreover, in January, sales apparently have dropped below the year-ago level in nominal terms. In the manufacturing and mining sectors, further production cutbacks and layoffs are evident among a broad spectrum of industries. Residential construction rose in December, but builders are skeptical that the improvement will be sustained, given the recent rise in mortgage interest rates. Apparently the region s supply of unsold homes actually has increased recently, contrary to the pattern elsewhere. Farmers are experiencing a continuing decline in commodity prices and are finding it increasingly difficult to obtain credit. Commercial loan demand at banks increased in December but not because of increased confidence but to finance excess inventory. Regional banks are becoming increasingly worried about the creditworthiness of borrowers. At regional S&Ls, mortgage lending continues to be very slow, with no significant improvement in savings flows to the industry.
Consumer Spending
A spending flurry late in the Christmas season pushed December
retail sales in various Twelfth District states about 1-5 percent
above the year-earlier pace in nominal terms. This represented a
decline in real terms, however. Moreover, since early January, sales
have slowed, dropping below the year-ago level in nominal terms and
widening the year-to-year real decline. Retailers believe that the
pre-Christmas burst in sales was "borrowed" from later periods.
Indeed, they expect sales to remain sluggish through the early
months of 1982 due to an expected further increase in unemployment
and the cautious spending behavior being exhibited by consumers. As
evidence of consumer caution, retailers point out that they achieved
the pre-Christmas flurry only by offering severe price markdowns and
that consumers stayed away from durable goods and focused on apparel
and other necessities. The retail sector is experiencing a squeeze
in profit margins. Collections also are slowing. Unlike the 1974-75
recession, inventories are not excessive relative to sales, however,
in that retailers have tried to hold down short-term borrowing. The
exception is at automobile dealerships, where new car sales early in
1982 have dropped even further below year-ago levels.
Mining and Manufacturing
Respondents report further cutbacks in production and employment
among a wide number of industries. In the forest products industry,
weakness in the paper segment of the market is offsetting slight
gains in lumber employment, resulting in continued net layoffs. In
the metals industries, further price weakness is forcing additional
closures and curtailments in January. Many of these cutbacks can be
traced to weak demand from the national automobile, housing,
appliance and aircraft manufacturing industries. Copper producers in
Arizona and Utah are extending Christmas holiday shutdowns,
indefinitely in some cases, until prices recover. Employment also is
being cut back at silver-lead-zinc mining facilities in Idaho, at
steelmaking facilities in California and in the Pacific Northwest
aluminum industry. In the automobile industry, General Motors
Corporation plans to close temporarily its Fremont, California plant
on February 1 to reduce excess inventory. In the aerospace industry,
lagging orders for commercial jet aircraft and electronic products
are forcing further layoffs, with the Lockheed Corporation actually
phasing out production of its L-l0ll transport.
Real Estate
Twelfth District respondents report no sign of the pick-up in new
home sales reported elsewhere. On the contrary, they contend that
the region's inventory of unsold homes is still increasing.
Moreover, the value of residential real estate is depreciating 5-10
percent annually, both as a result of actual price reductions and
seller-financed transactions at less than market interest rates.
Failures and bankruptcies in the real estate and homebuilding
industries are mounting. Although Western homebuilding activity
picked up in December, builders tend to downplay the improvement,
stressing that Western homebuilding remains further below the 1978
peak than is true nationally. Moreover, they are concerned that the
recent increase in mortgage rates will arrest the homebuilding
recovery. Nonresidential construction activity has shown little
change recently and is running at approximately the year-ago pace.
Agriculture
Twelfth District farmers and ranchers experienced further
deterioration in their financial situation in December as a result
of a further decline in commodity prices. Price weakness continued
to reflect bountiful supplies and weak export demand. In January,
regional farmers have been benefiting from higher prices for citrus
fruits as a result of the Florida freeze. Cattle prices also have
been rising. Nevertheless, the farm sector is in serious financial
difficulty. Many farmers need to extend debt acquired during past
periods of drought but are finding it difficult to qualify for loans
because of decreasing creditworthiness. A growing number of farms
are for sale, especially in California.
Financial Institutions
Credit extended by Twelfth District banks rose substantially in
December, with lending to businesses and consumers accounting for
most of the increase. Bankers regarded this increased demand for
loans as a sign of further economic weakness, however. Involuntary
inventory accumulation and inadequate generation of working capital
were the most frequently cited reasons for the increased business
loan demand. Banks are becoming increasingly concerned about the
creditworthiness of their borrowers, and have generally tightened
their credit standards. Loans to the forest products, agriculture,
automobile and farm equipment industries are being subjected to
particular scrutiny. In December, real estate lending continued
sluggish throughout the District, particularly for residential
construction.