May 6, 1985
Introduction
The economy of the Twelfth District remains healthy, but there are
fewer signs of continuing improvement and some signs of weakness.
Although retail sales and service sector employment are
satisfactory, the share of manufacturing employment has fallen since
last year. Home construction and sales activity are at satisfactory
levels, but are sensitive to ambient interest rates. The problems
with western agriculture do not appear as severe as elsewhere in the
country and do not appear to have generated excessive loan loss
exposures for lenders. The forest products industry in the Pacific
Northwest and the primary metals industries are the weakest sectors
in the District economy. The financial sector appears sound, with
satisfactory deposit inflows and increasing earnings.
Consumer Spending
Retail sales activity in the District has been satisfactory, but the
growth in sales over the same period in 1984 has been modest.
Reports from several large department store chains, for example,
suggest year-over-year growth as of February of about 9 percent.
Service sector employment continues to be a major source of strength
in the District. In the State of Washington, this sector has been
particularly important in offsetting the continued weakness in other
major employment sectors. Sales of new and used automobiles appear
to be satisfactory, increasing by about 5 percent in March over
February in the San Francisco Bay Area, for example. The sales
increases are attributed partly to promotional financing offered by
several manufacturers.
Real Estate and Construction
New construction and home sales activity appear to be at healthy
levels and builders are optimistic about prospects for 1985 in
general. Prices reportedly have stabilized or softened in many parts
of the District, including the normally fast-paced Southern
California market. Housing activity appears to be very sensitive to
changes in the level of interest rates at current interest rate
levels. There were several reports of sharp downturns in home sales
activity during the recent modest uptick in mortgage loan rates.
Commercial real estate development appears to be healthy,
particularly in office and retail park construction, consistent with
the growth in the service sector.
Business Activity
Business activity generally in the District shows little evidence of
either significant growth or decline. This is reflected in
unemployment rates which have either stabilized or declined only
slightly in recent months. The share of total wage and salary
employment represented by the manufacturing sector has fallen
slightly since last year, continuing its slide from 1982. For the
District as a whole, the manufacturing employment share stands at
about 18 percent.
The forest products industry in the Pacific Northwest and the primary metals industries elsewhere in the District continue to be the weakest sectors. There continue to be mill closures in the Pacific Northwest and the industry is undergoing a major restructuring. This restructuring may ultimately involve wage cuts of as such as 20 to 25 percent in this highly unionized industry. In the mining industry, there have been several major mine and smelter closures in recent days. The impact of these events on Utah's copper industry alone is estimated to represent 6 to 7 thousand lost jobs. In both industries, the strong dollar and vigorous foreign competition have contributed to continued deterioration.
Agriculture, although still weakened by soft product prices and poor export opportunities, does not appear to be weakening further. The western agricultural economy appears to be more diversified and resilient than elsewhere. In California's Central Valley, for example, the unemployment rate in February fell to 12.7 percent, down from 14.6 percent in the same month in 1984. Retails sales activity in the Central Valley—dependent upon the health of the primary agricultural sector—also have been recovering in recent months.
The Financial Sector
Commercial loan demand has been steady at District banks and loan
quality reportedly has improved, particularly in the formerly weak
agricultural lending business. There are several reports of
improvements-and even major turnarounds-in bank earnings for the
first quarter of 1985. This development is at least partly ascribed
to recent declines in the cost of funds. Deposit inflows at District
financial institutions also are reported to be healthy, particularly
in the money market deposit accounts (MMDA). These accounts have
benefited from recent narrowing in the spread between the yields in
money market mutual funds and the rates offered by banks and
thrifts. The bank closures that have occurred in the District have
been confined largely to small institutions with undiversified
portfolios and weak local economies.