June 25, 1984
In the Twelfth District, the growth of the economy appears to be slowing. Consumer spending continues to display exceptional strength, with both department stores and automobile dealerships experiencing excellent business. Nonresidential construction activity also continues to pick up. But in May, the continued rise in mortgage interest rates further reduced both the construction and sale of new homes. Employment in the manufacturing sector generally has been growing at a slower rate due to the ripple effects of the housing slowdown on such industries as lumber, near full capacity operations in a few industries, and the efforts of firms to hold down unit labor costs. In agriculture, the outlook for significant improvement in farm income in 1984 has deteriorated due to the prospect of excess supplies, aggravated by a decline in exports. In April and May, Twelfth District banks experienced a large outflow of money market deposit accounts (MMDAs) as they held the line on MMDA rates.
Consumer Spending
Throughout the District, consumer spending is reported to be
extremely strong. In fact, the rate of growth apparently accelerated
in May in contrast to the national pattern. Major department stores
in Southern California, for example, experienced an average 19
percent year-to-year gain in sales in May compared with a 14 percent
gain in April. In Oregon, respondents describe retail sales as a
bright spot in an otherwise sluggish recovery. Sales of apparel have
been especially strong, but sales of such durable goods as home
electronics (video-recorders, televisions) and housewares also are
reported to be expanding at their earlier rapid rate. The high level
of new home sales earlier this year is maintaining current sales of
furniture and appliances at a strong pace, although some slowdown is
expected soon due to the reduced homebuilding and sales pace. Auto
sales in May reached their highest level since the late 1970s,
supported by the increased availability of foreign and domestic
models and subsidized financing by dealers. Consumer installment
debt is growing as a percentage of income and retail sales, but loan
delinquency rates nevertheless are declining.
Manufacturing and Mining
In most District states, the growth of manufacturing employment has
slowed in recent months. In California, employment growth in the
manufacturing sector during the past four months has trailed the
national gain. There are several reasons for this slowdown. Some
industries have been boosting output without a corresponding
increase in employment so as to hold down unit labor costs. Others
have been cautious about hiring new workers and have relied instead
on increasing overtime. Still others—notably the Pacific Northwest
aluminum and paper industries—are operating at near full
capacity. But there also have been some recent layoffs in certain
industries. The Pacific Northwest lumber industry has been cutting
its payrolls due to the effects of the national homebuilding
slowdown in reducing orders and prices for its products. The copper,
steel and coal industries in the Intermountain states have been
laying off workers due to excess worldwide supplies and rising
imports. The most rapid employment gains continue to occur in the
electronic equipment and missiles and space industries located In
California, Oregon, Arizona and Utah. Electronic firms continue to
benefit not only from rising defense and consumer demand but
business capital spending to increase efficiency. Other capital
goods industries adding to their payrolls include nonelectrical
machinery, trucks and firms manufacturing military and commercial
transport aircraft.
Construction and Real Estate
Housing starts and sales of new homes in the West are reported to
have slowed further since April but relatively moderately
considering the current high level of mortgage rates. Respondents
attribute the moderate nature of the slowdown to the increased
public acceptance of adjustable rate mortgages and the increased
offerings of "buy-down" programs by builders. Sales of existing
(older) homes actually have continued to increase due to the rise in
seller financing schemes. Bankers believe mortgage rates have
reached a threshold, however, where even a further 50 basis point
rise would have a dramatic negative impact on housing markets. The
rise in interest rates has not affected the sharp increase in
nonresidential construction projects planned and underway in the
West, including new shopping malls, hotels, offices, buildings and
warehouses. In Southern California, an influx of foreign money from
Pacific Rim sources is an important source of financing. Firms
continue to be cautious about investing in new industrial
structures, except for electronic equipment manufacturers.
Agriculture
The outlook for significant improvement in California net farm
income in 1984 has become less favorable due to the prospect of
overly abundant harvests and break-even prices for certain key
crops. Cotton plantings are progressing well, and prices also look
favorable relative to a year ago. But the harvest of wheat, barley,
alfalfa and other small grains is in full swing at prices that at
best just about match those of a year earlier. The harvest of
vegetable crops has been outstanding. But demand has lagged behind
production, reducing prices for such items as lettuce, broccoli and
celery to or below the break-even point for most growers. Similarly,
the huge carryover of raisins and potential excess supply of wine
grapes threaten to hold down grape prices. In the Pacific Northwest
the outlook for farm income is less favorable than in California due
to the greater importance of grains in the crop mix. In the Pacific
Northwest, exports of grain are reported to be running 30 percent
below the level of a year ago despite increased sales to China.
Throughout the Twelfth District, rising interest rates are placing
extreme financial pressure on those farmers who already are highly
leveraged.
Financial Institutions
Twelfth District banks experienced a significant runoff in money
market deposit accounts (MMDAs) during April and May (nearly $1.3
billion), when market interest rates were moving upward. While not
all institutions suffered outflow, the large it magnitude of the
recent weakness was due to a number of factors. First, loan demand
at many banks remains moderate to weak, although total loan growth
at large banks has picked up in the second quarter. This slack loan
demand has left many banks with an abundance of funds. Without the
demand-side pressure, many banks are holding the line on MMDA rate
increases to minimize costs and maintain net interest margins. Thus,
these conditions have opened a significant rate differential between
banks and a money market funds, which is causing some of the runoff.
A second factor is banks' decision to direct funds from MMDAs and
into longer-term certificates by offering higher rates on longer
certificates. In addition, a few smaller institutions also have
reported that the turmoil in the financial markets has caused
depositors to move funds into U.S. Treasury securities. Finally,
these factors coincide with the typical seasonal weakness in
consumer deposits around the April tax date, as depositors withdraw
MMDAs to make their tax payments and transfer funds into IRA/Keogh
accounts.