August 6, 1984
In the Twelfth District, the growth of the economy appears to be slowing as rising interest rates and the strong dollar adversely affect certain key sectors. Consumer spending appears to have grown at an accelerated rate in July, with both department stares and automobile dealerships experiencing strong sales. Nonresidential construction activity also continues to pick up. But rising mortgage interest rates have further reduced both the construction and sale of new homes. Employment in the manufacturing sector generally has been growing at a slower rate as the rising foreign exchange value of the dollar has increased imports of lumber and primary metals, forcing Western producers to curtail operations. In agriculture, the prospects for significant improvement in farm income in 1984 have deteriorated further as prices have weakened in response to overly abundant harvests and declining exports. In July, Twelfth District banks experienced a further large outflow of money market deposit accounts, without an offsetting pickup in large time deposits.
Consumer Spending
July was a very favorable month for retailers. Sales are reported to
have grown at an accelerated rate, following some moderation in
June. Throughout the District, major shopping malls and department
stores experienced year-to-year sales gains ranging from 10 to 15
percent. This occurred even in Oregon where the economic recovery
generally has been faltering. While retailers are concerned that
rising interest rates could dampen consumer spending, they are
encouraged that thus far rapid gains in employment and income have
been outweighing that negative influence. This is evidenced by
continued strong demand for such discretionary durable goods as home
entertainment electronics (video-recorders, televisions) along with
strong sales of nondurable items, especially apparel. Auto sales
also continue to be excellent and would be even higher were it not
that dealer inventories are low. Consumer debt continues to grow at
a record rate, but retailers do not consider this situation
worrisome since consumers are keeping their payments current. The
excess inventory situation that prevailed at department stores in
June was corrected by July's strong sales pace. Despite the interest
rate climate, most retailers are optimistic that they will
experience a very robust fall and Christmas buying season.
Manufacturing and Mining
With the important exception of California, the growth of
manufacturing employment in most District states has slowed
recently. Such basic materials industries as aluminum, copper, steel
and lumber cut back production and employment sharply in July. The
cutbacks in the primary metals industries have been attributable to
the strength of the U.S. dollar which has been increasing the influx
of lower- priced foreign imports and forcing domestic producers to
reduce their prices. Layoffs have been most severe at copper mining
and processing facilities in Utah and Arizona, but steel mills in
Utah and aluminum plants in the Pacific Northwest also have been
curtailing operations. Pacific Northwest lumber mills have been
closing for extended vacations to reduce the heavy buildup of
inventory that has occurred in response to the downtrend in national
homebuilding activity and to increased Canadian imports.
Fortunately, the paper segment of the forest products industry is
operating at near full capacity. Rising federal expenditures for
defense and space programs, as well as increased investment in
aircraft by the world's airlines, continue to generate new jobs in
the electronic equipment and aerospace industries. But consumer and
business demand for some electronic equipment has leveled off
recently, suggesting that the rapid employment growth that has been
occurring in that industry could slow.
Construction and Real Estate
Housing starts in the West have continued to fall further below this
year's peak reached in January, contrary to the recent increase
nationally. Sales of new homes also are reported to have slowed 20-
30 percent in recent months. Bankers report that even rates on
adjustable rate mortgages have reached the point where many more
potential buyers are being priced out of the market. Similarly, even
the increased offerings of "buy-down" programs by builders are no
longer sufficient to prop up the housing market. In Southern
California, the slowdown in home sales has caused some builders to
cancel planned projects. In Oregon, residential foreclosures are
increasing. Rising interest rates have not put a damper on the large
number of nonresidential construction projects planned or under
construction in the West however. Salt Lake City, Portland, Tucson
and some other metropolitan areas are reported to be on the brink of
a boom in construction of new shopping malls, office towers and
hotels. Firms continue to be cautious about investing in new
industrial structures, except for electronic equipment
manufacturers.
Agriculture
Prospects for significant improvement in California net farm income
in 1984 have become even dimmer recently due to the effects of hot
weather in hurrying the harvest of many crops, flooding the market
with excess supplies and reducing prices below the break-even point
for many growers. Harvests of most tree fruit and nut crops have
been anywhere from one-third higher to as much as double production
levels of a year ago. The harvest of vegetable crops also has
been outstanding. But demand has lagged behind production, reducing
prices for important vegetable crops to or below break-even levels.
Growers of raisin and vine grapes also are likely to experience
depressed prices due to the huge carryover of raisins and the slow
growth in overall wine sales and increased share of the market being
supplied by foreign imports. The cotton crop is progressing well,
but the strong U.S. dollar and prospect of record world production
have been reducing 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.
Financial Institutions
In July, banks in the Twelfth District continued to experience the
large outflows in money market deposit accounts that began late in
the first quarter. The $2.6 billion drop in these deposits from
their February level of $40.4 billion is due in part to the
hesitancy of banks to offer rates competitive with those available
through money market funds.
In May and June, large time deposits picked up, helping to offset this outflow. But in the first three weeks of July, growth in those deposits slowed considerably. The sharp drop in business loans that occurred during this period, following two months of rapid growth, may be one reason banks were less aggressive in acquiring these funds. Consumer and real estate loans closed continued to grow at their trend rates for the year, with consumer loans showing remarkable growth. But bankers report a decline in residential mortgage loan applications, suggesting that the demand for those loans also is falling.