September 16, 1984
The Twelfth District economy continues to grow, but at a slower rate due to weakness in certain sectors. Retail sales at department stores and automobile dealerships are reported to have dropped in August, although there may have been extenuating circumstances such as the effect of the Olympic Games and shortage of popular automobile models. Nonresidential construction activity continues to pick up, with additional projects announced recently. But rising mortgage interest rates have further reduced both the construction and sale of new homes. Weakness in certain industries, especially primary metals and lumber, is slowing the overall growth of manufacturing employment. The agricultural sector has been experiencing a dismal summer as overly abundant harvests have brought low prices for fruits and vegetables, and farm land prices have continued to drop. Banks reported strong consumer loan growth in August, but most expected some slowdown.
Consumer Spending
Retail sales at department stores and shopping malls are reported to
have dropped off in August, following a favorable month in July. For
example, the four major department stores in Southern California
experienced a noticeable slowdown which reduced their year-to-year
gain in sales for that month to 13 percent compared with 17 percent
in July. A similar slowdown was reported for stores in Washington
and Utah. In Southern California, some of the slowdown occurred
because residents stayed away from the stores during the Olympic
Games. But the fact that sales fell even further in early September
suggests that consumers may be becoming more cautious. Back-to-
school apparel sales were disappointing, while sales of furniture
and appliances declined. The slowdown has left retail inventories
above desired levels. As a result, retailers plan to restrain their
inventory investment until just before the Christmas holiday season.
Automobile sales apparently also fell in August, but respondents
attributed at least part of the decline to extreme shortages at the
end of the model-year. Despite the pause, retailers expect a strong
Christmas selling season.
Manufacturing and Mining
The growth of manufacturing employment in most Twelfth District
states has slowed during the third quarter, reflecting weakness in
such important industries as primary metals, lumber and petroleum
refining. Aluminum companies in the Pacific Northwest and copper
producers in the Intermountain states have been curtailing
operations recently as the rising foreign exchange value of the U.S.
dollar has increased the influx of lower-price imports and forced
domestic producers to reduce their prices. The administration's
decision in early September to deny copper producers import
protection suggests that further layoffs will occur in that
industry. Pacific Northwest lumber mills increased production in
August, following extended vacation closures in July, but output
still remained well below levels reached earlier this year due to
the downtrend in national homebuilding activity and inroads by
Canadian lumber imports. Two lumber companies declared bankruptcy in
August due to their inability to pay for high-cost public timber
under contract, and numerous others also could be forced to go out
of business if Congress does not grant the industry contract relief.
Fortunately, the paper segment of the forest products industry is
experiencing extremely strong demand. The largest gains in
manufacturing employment continue to occur in those industries
benefiting from rising federal expenditures for defense and space
programs and increased business investment. These include the
electronic equipment, aircraft and missiles and nonelectrical
machinery industries.
Construction and Real Estate
Housing starts in the West have shown further weakness recently,
with the pace now off about 25 percent from this year's peak reached
in January. Sales of new homes have declined by a similar percentage
from levels reached earlier this year. Permits point to a further
slowdown in homebuilding. The inventory of unsold new homes has
risen but is not considered to have reached a disturbing level,
partly because developers have attempted to protect themselves by
building mainly on a pre-sold basis. Home prices are about equal or
slightly higher than those of a year earlier. The use of creative
financing is rising. In addition to below market interest rates,
some builders are offering to pay all closing costs. Despite rising
interest rates, nonresidential investment continues strong in the
West, with a large number of office towers, shopping malls and
hotels planned or under construction in major metropolitan areas.
Office vacancy rates in these areas already are considerably above
the national average. Rental rates are falling, and bankers are
concerned that a serious excess supply of office space may be
developing.
Agriculture
This summer has been dismal for the California agricultural sector.
Unusually hot weather either damaged fruit and vegetable crops or
alternatively hurried their harvest, flooded the market with excess
supplies and reduced prices below the break-even point for many
growers. The fact that the heat caused many crops to ripen all at
once aggravated the downward pressure on prices. Table grape prices
have been the lowest in three years. The raisin inventory already
amounts to two years' consumption, so the current harvest of raisin
grapes is expected to bring very low prices. Similarly, the nation's
largest winery—Gallo—is reported to be offering only 40
percent of last year's price for wine grapes not already under
contract. The hot weather helped spur the growth of the California
cotton crop, but the strong U.S. dollar and prospect of record world
production have caused futures prices to move even lower recently.
In California, Utah and other Intermountain states, the livestock
sector has not shown significant improvement. In August, beef cattle
prices were just about equal to last year's level, while dairy
cattle prices were well below the level of a year earlier. Farm and
ranch real estate values continue to fall, especially for nut and
grape acreage in the San Joaquin Valley area of California.
Financial Institutions
In August, consumer credit (not seasonally adjusted) at large banks
in the Twelfth District grew at a 24 percent annual rate. This
represented the largest monthly increase in 1984 and offset weakness
in commercial and real estate lending. A sample of smaller
institutions showed similar behavior. These increases continue the
pattern of strong consumer loan growth shown earlier this year.
Bankers in the region attribute the strength to improved economic
conditions which have boosted consumer purchases of new cars and
recreational vehicles. While a number of banks also report strength
in home equity loans, others have experienced slow to flat demand
for those loans as consumers have shifted to use of personal credit
lines and credit cards for financing. The forecast for consumer
credit remains mixed. Many banks expect these loans to continue to
grow rapidly through year-end. However, an even larger number of
institutions expect slower growth in personal income and rising
interest rates to cause a slowdown in both consumer spending and
borrowing. A few of these already have experienced a falloff in
consumer loan demand.