March 13, 1984
The Twelfth District economic recovery is continuing with increased momentum. Consumer spending in the post-Christmas holiday period has been stronger than it has been nationally, with both retail stores and automobile dealerships experiencing large year-to-year sales gains. Western homebuilding activity in January rebounded even more strongly than nationally, and permits for new units point to a continuing high-level of activity. Nonresidential construction spending is really beginning to pick up. In the manufacturing sector, nearly all industries have been increasing production and employment recently, with demand especially strong for defense and business capital equipment. Agricultural crop prices are up sharply from a year ago and the planting season is progressing well. In the deregulated environment, financial institutions have chosen not to compete aggressively against each other for small time deposits but to offer rates fairly close to those of money market funds.
Consumer Spending
Consumer spending has been strong in the post-Christmas holiday
period and would have been even greater at some retail outlets had
not late December "clearance" sales so depleted inventory as to
reduce merchandise selection. Major department stores in Southern
California, for example, experienced an average 11 percent gain in
sales in both January and February over levels of a year earlier.
This far surpassed the gain at department stores nationally in
January. In other Western states—even those where unemployment
rates are still above the national average—year-to-year sales
gains were nearly as large as in California. Sales of nondurable
goods, especially clothing, have been especially strong. But durable
goods such as furniture and appliances also are selling well.
Moreover, auto dealerships have been experiencing much larger sales
gains than department stores, even in rural areas. To finance their
heavy expenditures, consumers have been sharply increasing their
installment debt but are reported to be very current on their
payments.
Manufacturing and Mining
Nearly all manufacturing industries have bean expanding output and
employment recently, with the exception of some primary metals,
notably copper. The Pacific Northwest lumber industry has not yet
been adding workers but has been experiencing a resurgence in orders
and prices since November as national homebuilding has shown renewed
strength. Employment growth has been especially strong in the
electronic equipment and missiles and space vehicles industries
located in California, Oregon, Arizona and Utah. Electronics firms
have been benefiting not only from rising defense and consumer
demand but business capital spending to enhance efficiency. Orders
also have been increasing sharply for other capital goods, including
non-electrical machinery, trucks and aircraft. In Washington, the
nation's leading manufacturer of commercial transport planes has
been adding workers since October, reversing a two-year cutback. A
large manufacturer of long-haul trucks experienced a doubling of
profits during the fourth quarter from a year earlier. Even
manufacturers of such big ticket discretionary consumer goods as
recreational vehicles and pleasure boats are experiencing an upsurge
in sales. Despite increased production, the manufacturing sector
generally still has ample unused capacity, except for paper where
demand for certain products has reached the "boom" stage.
Construction and Real Estate
Homebuilding activity has shown even more dramatic strength in the
West recently than it has nationally. In January, Western housing
starts soared upward by 46 percent, reaching the highest level since
late 1979 and a pace 73 percent above the level of a year earlier.
Permits issued for new dwelling units in the region also rose more
than nationally, suggesting that Western homebuilding activity in
coming months will remain relatively strong. Sales also are reported
to be holding up well, although home prices in the West generally
are up on average about 6 percent from a year ago. Respondents
attribute the greater-than-expected strength in housing to increased
availability of adjustable rate mortgage packages, which offer
initial rates as much as 3 percentage points below conventional
fixed rate mortgages, and to gains in real personal income. They
also mention that buyers feel that both mortgage and inflation rates
are going to move higher and that now is an opportune time to
purchase a home. Equally impressive is the strong pickup already
occurring and planned in nonresidential construction activity.
Throughout the District, respondents report the launching of a large
number of new projects such as shopping and convention centers,
hotels, office buildings, and highway improvements. Firms continue
to be cautious about investing in new industrial structures,
however, except for electronic equipment manufacturers and other
defense suppliers.
Agriculture
Crop conditions throughout the District generally are considerably
more favorable than a year ago. District farmers are benefiting from
sharply higher prices for vegetables and citrus crops, partly as a
result of the winter freeze in Florida and Texas. California is
experiencing one of the warmest and driest winters on record—in
contrast to last year's flooding—so that the planting season is
progressing normally. The mild temperatures—and consequent early
budding—will mean that yields of tree fruits and grapes will be
moderate. This will push up prices since tree fruit inventories are
low. Production coats are stable, including interest rates, while
the growing domestic economy generally is helping to boost prices.
However, the slow export market is still a problem. Despite improved
market conditions, many small growers in California are still in
serious financial difficulty because of previous poor years.
Numerous small farms and parcels have been put up for sale to
lighten debt burden. Yet even at land prices far below those of a
year ago, owners are having difficulty finding buyers.
Financial Institutions
The financial institutions in the Twelfth District have found the
deregulated market for small time deposits to be rather calm after
the initial scramble for funds. Some observers suggest that for
short-term accounts interest rate differentials of greater than 20-30 basis points are required before significant movement of funds
between institutions occurs. Rates have been generally stable in
recent months, as the industry seems to have avoided "rate wars" by
keeping their rates in line with those offered by money market
funds. The rates on Super-NOWs have been particularly stable,
staying around 7 percent, as its role as a transaction deposit
apparently dominates any interest rate concerns. Financial
institutions have not extensively used their increased ability to
tailor the maturity of their deposits. Some have tried to lengthen
maturity. But in general there seems to be a willingness to accept
the consumers' desire to keep deposits under a year in maturity
because of their uncertainty over future interest rates.