May 12, 1982
The Twelfth District economic recession does not appear to have ended. The general pattern of economic activity since the last report has continued to be downward. Consumer spending during the Easter season was disappointing, with sales in April just about matching the year-ago pace, representing a decline in real terms. In the manufacturing and mining sectors, a number of industries are undergoing a new wave of production cutbacks. The only notable improvement in sales has occurred in electronic equipment. Homebuilding has picked up recently, but the continued decline in home sales suggests the recovery may not be sustained. Storms have inflicted serious damage on the California agriculture industry, and crop prices generally remain below the level of a year ago. Bank credit growth at Twelfth District banks has slowed considerably since February, as the weakness in the regional economy and the heavy debt burden of borrowers has stifled business loan demand.
Consumer Spending
Respondents report that retail sales throughout the Twelfth District
continue to be slow. Department store sales in April apparently just
about matched the dollar volume of a year-ago, representing a
decline in real terms. Easter business picked up seasonally but was
disappointing relative to the level of a year-earlier. Not even
price discounts and heavy advertising campaigns were effective in
significantly spurring sales. Sales of durable goods, such as
furniture and appliances, continue to be particularly weak, due both
to the housing slump and the reluctance of consumers to incur new
debt. Sales of nondurable goods have been holding up better, but
even grocery stores have been feeling the effects of recession. An
increasing number of small retail outlets are going out of business.
Sales of new automobiles declined in April, despite offers of below-
market financing and free warranty programs.
Manufacturing and Mining
Twelfth District manufacturing and mining industries have been
undergoing a new wave of layoffs and production cutbacks in recent
weeks. While employment in the lumber segment of the forest products
industry has stabilized, the paper industry continues to cut back
production. Layoffs also continue in the construction, commercial
aircraft, and metals industries. Due to numerous commercial aircraft
order cancellations, the Boeing Company in Seattle now plans to
layoff at least 8,000 workers by year-end, instead of the 5,000
announced earlier. Partly as a result of these cutbacks, Pacific
Northwest aluminum producers also are cutting production further.
Other regional metals industries are sinking deeper into recession
as a result of depressed demand from the national automobile,
appliance and construction industries. In mid-April, Phelps Dodge
Corporation closed nearly all of its copper mines and smelters in
Arizona and New Mexico for an extended period, laying off 3,800
workers. Declining world oil prices also are forcing cutbacks in
such energy programs as oil drilling, oil shale development and coal
production. The only significant improvement in sales is occurring
in the electronic equipment manufacturing industry, both as a result
of a pickup in commercial orders and continued strength in defense
business.
Construction and Real Estate
The Twelfth District is finally experiencing a pickup in
homebuilding. But regional housing starts had dropped to a post-
World War II low in February, so residential construction remains
extremely depressed. Moreover, sales of new homes have continued to
drop, and since inventories of unsold homes are still high, it is
doubtful the recovery can be sustained until those inventories are
worked off. California realtors are concerned that the Supreme Court
may rule that home buyers in the state may no longer assume existing
low-interest loans. Such a ruling would further reduce sales of
older homes. Meanwhile, the slump in sales is further eroding
selling prices for both new and older single-family homes and
condominiums. Nonresidential construction activity also is slowing
substantially. Developers are canceling some planned commercial
projects, such as shopping centers and office buildings. Due to
soaring costs, utilities in Washington have been forced to terminate
construction of three nuclear plants.
Agriculture
Recent storms in California have inflicted serious damage on the
agriculture industry. Heavy rains and flooding prevented planting of
an entire strawberry crop, delayed planting of such important crops
as cotton, rice and tomatoes, and drowned much of the State's
asparagus crop. Experts fear that the roots of a wide variety of
fruit and nut trees may rot due to flooding. Thus, even if crop
prices rise this year, California farmers could experience a decline
in receipts. In other Twelfth District agricultural areas, crop
prospects are favorable. The increase in livestock prices in recent
months also is a welcome improvement. Nevertheless, district bankers
express growing concern over the heavy debt position of the
agricultural sector generally.
Financial Institutions
Bank credit growth in the Twelfth District has slowed considerably
since February. In particular, the pace of business lending has
leveled off, as the weakness in the region's economy and the heavy
debt position of borrowers has stifled loan demand across nearly all
industries. Twelfth District banks report a sharp increase in
business loan delinquencies over the past few months and expect loan
losses to be double those reported in the last normal year of 1980.
Bankruptcies are up in the forest products and construction
industries, as well as for small firms generally. Furthermore, cash-flow problems that are generated by firms' inability to collect
receivables on time are becoming much more widespread throughout the
business community. Because of this increase in delinquencies and
problem loans, as well as continued pressure on net interest
margins, many banks in this region are undertaking programs to
bolster earnings by cutting noninterest costs.