The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
December 25,1 981
RecessionYear
The West always endures recessions better
than the rest of the nation, or so the cIiche
goes. That cIiche seemed somewhat battered
in late 1981, however, as regional business
activity weakened everywhere-from farms
to factories to construction sites and government offices. Most observers forecast a continuation of the slump into early 1982, but
then expect a turnaround generated by a
boom in defense and certain other sectorsnot to mention the stimulus arising from
income-tax cuts and the recent drop in inflation and interest rates.
Activity in this nine-state region had been
spotty du ri ng the earl ier part of 1981, but in
the fall months, production cutbacks and
layoffs became widespread throughout the
goods-producing sectors-manufacturing,
mining and construction.
farmers
and ranchers experienced a second straight
year of declining net income as a result of
weakening commodity prices and rising
production costs. Meanwhile, residential
construction and home sales remained
severely depressed, despite a late-year downturn in mortgage-loan rates.
Growing labor-market weakness
As a reflection of the late-1981 slump,
employment increased only about one percent, on an annual-average basis, to about
1 6.4 million for the year. The increase in jobs
was only about half as great as the 1980
increase, and only a fraction of the gains
recorded during the boom of the late 1970s.
And for a change, employment increased no
faster in the West than in the rest of the nation
(see chart). The only significant gains occurred in trade and services; indeed, those
two industries accounted for practically all of
the region's 400,000 employment increase of
the past two years. Job prospects turned bleak
in a number of manufacturing industries as
the year advanced, while construction employment continued to decline on the heels
of the 1980 slump. Reflecting the weakening
of state-local government finances, job levels
remained practically flat in the government
sector for the fourth straight year, following
several decades of steady growth.
Unemployment soared throughout the West,
as employment stagnated and as more and
more jobseekers poured into the regional
labor force. For example, California(s jobless
rate practically matched the national jobless
figure, which averaged 7.5 percent of the
labor force for 1981 as a whole. Over the
course of the year, unemployment rates rose
several percentage points in most major
Western states. Indeed, in the Pacific Northwest, jobless rates reached double-digit
levels during the fall months because of the
impact of the nationwide housing slump on
the region's forest products industry.
Personal income rose about 11 Y2percent, to
$435 billion for the year. This was slightly
better than the gain elsewhere-yet somewhat below the region's 13-percent gain in
1980. Still, real incomes increased slightly,
because consumer prices rose about 11 percent instead of at the soari ng 16-percent pace
recorded the previous year. (The improvement in the inflation picture may have been
overstated, because of the way the volati Ie
housing component skewed the consumerprice index, but some improvement nonetheless was evident.) Retail sales ran almost
10 percent ahead of the previous year's pace
through the early fall months, thus outrunning the 1 980 increase, but still failing to
keep up with the pace of inflation. Moreover,
the year-to-yeargain in sales then narrowed
toward yearend. Early signs pointed to a
disappointing
season -as evidenced
by the number of pre-Christmas clearance
sales-and to a growing squeeze on retail
profit margins.
Weak industrial performance
In the industrial sector, the key aerospaceequipment industry reduced its workforce
about three percent over the course of the
year because of a slowdown in orders for
commercial products. Orders for commercial
in this nevl/sleHer do not
reflect the view:; of the management
8211
J< of Sail Frar:cisCf}:
()f
(yf
(f
()f
G()\/eril(")fS
()f
FeCi€ra!
jet transports fell off sharply, reflecting the
impact of declining passenger traffic and
rising fuel costs on the earnings of the world's
airlines. (As one consequence of this slowdown in orders, Lockheed announced plans
to phase-out production of the wide-bodied
L-l 011 jet transport.) Civilian orders for electronic equipment also slowed as the national
recession caused households and businesses
to cut spending for such items as computers
and communication equipment. Increased
foreign competition added to the problems of
California semiconductor firms, resulting in
extended plant shutdowns during holiday
weekend periods to work off excess i nventory. In contrast, defense and space business
increased sharply, as Congress substantially
increased spendil)Kqn such prograrns.
measures induced by the Administration's
decision to accelerate decontrol of domestic
crude-oil prices. Western utilities and industrial plants reduced their demand for fuel oiL
taking advantage of ample supplies of cleanburning natural gas-which because of price
controls were also available at lower cost.
Meanwhile, on the supply side, higher prices
spurred a modest increase in regional crude
production, on the heels of the sharp output
gains of the 1 976-80 period. But this time the
boost Came not from Alaska but from California, where higher heavy-oil prices triggered a wave of oil-recovery projects from
older fields. The import share of the regional
market continued dropping to 15 percentfrom 48 percent at the 1976 peak-as Western refineries substituted more and more
locally-produced oil for imports.
Western steel production rose about seven
percent during the year, as the strong pace of
nonresidential-building activity (especially
an office-building boom) helped stimulate
regional steel consumption. Western producers also managed to capture a larger share
of the regional market, reducing the foreignimport share from 43 to 41 percent. The
production gain followed on the heels of a
20-percent decline in 1 980-when regional
producers closed a nu mber of high-cost faci 1ities-so that industry output remained well
below the 1979 peak. The Northwest's aluminum industry reopened some facilities shut
down during a 1 980 power shortage, but it
eventually found itself with excess inventories because of the nationwide homebuilding
slump and cutback in commercial-aircraft
production. In this situation, the industry
suffered a sharp profits squeeze, reflecting its
inability to raise prices sufficiently to compensate for soaring energy and other costs.
The copper industry meanwhile recovered
somewhat from its 1 980 strike, yet activity
remained well below the 1 979 peak due to
weakness in demand from the auto, housing
and appliance industries.
The three-year-old housing slump deepened
further in 1 981, with a 21 -percentdrop in
building activity. Indeed, housing starts in the
Western census region dropped to 243,000
units-the lowest for any year in the past
generation. (At that leveL starts were 56 percent below the 1 978 average, compared with
a dec! i ne of "on Iy" 41 percentfor the rest of
the nation.) Home prices apparently fell in
real terms, because of fall i ng demand and the
many "creative financing" schemes that
bu i Iders and homeowners had to use to sel1
their properties. Most homes for sale re-'
mained out of the average family's reach,
however, because of earlier price hikes and
the early-1981 upsurge in mortgage interest
rates, wh ich exceeded 18 percent at the peak.
During the year, the median-priced new
home in California approached $1 08,000about 50 percent higher than the median
price elsewhere. At mid-1981 mortgage
rates, a purchaser would have needed more
than a $45,000 annual income to qualify for
a mortgage loan on this average-priced
California home.
Regional petroleum consumption declined
again during 1981, partly because ofthe
recession, but also because of conservation
The nationwide housing depression meant a
deepening of the protracted slump in the
Western lumber industry. With the cutback in
Depressionin housing-and lumber
2
Change(%)
6
Change in Employment
4
2
1971
1973
1975
1979
1977
1981
growing areas remained safe from the insect's
depredations. Still, the state incurred heavy
expenses from the spraying of infected areas,
and lost some sales in U.s.and foreign markets in the subsequent uproar.
housing-related orders, and with declines in
orders from the nonresidential-construction
industry and the export trade, production fell
to the lowest level of the past three decades.
Softwood-lumber prices on average just
about matched the 1980 average figu re,
partly reflecting the impact of a strike at British Columbia mills in the early part of the
year -but the price trend was clearly downward, with prices at year-end off about 10
percent from late-1980 levels. The pulppaper segment of the industry recorded
modestgains in sales and employment during
the fi rst half of 1981, but it too later weakened
under the impact of the national recession.
Western cattle producers had a poor year,
as their costs continued to rise while their
prices fell under the impact of plentiful cattle
supplies and weakening demand. Beef-cattle
prices fell for the second straight year, and
by late 1981 were about 14 percent below
late-1979 quotations. Prices strengthened
somewhat during the summer months, but
then weakened again in the face .of reduced
consumer budgets and increased supplies of
red meat and poultry. In response, cattlemen
reduced their feedlot inventories this fall to
the lowest levels of the past 15 years, and
counted on slower marketings of fed cattleand lower feed-grain prices-to restore their
profit margins.
Squeeze on farm incomes
The combination offalling commodity prices
and rising production costs meant a severe
squeeze on the incomes of Western farmers
and ranchers. Cash farm receipts increased
eight percent, to about a $24-billion annual
rate, for the firstthree quarters of the year. Yet
bountiful supplies plus relatively weak export
demand depressed prices for a wide range of
products. And with production costs rising
sharply, especially for credit and for energyrelated inputs, net cash income apparently
weakened for the year. This in turn meant a
downtrend in salesfor major supplier industries, such as farm-equipment dealers.
Brighter prospects for '82?
On balance, the 1981 performance of the
Western economy was better than 1980' s
mediocre performance in one significant
respect-higher real incomes-but worse
in terms of the major employment and production indexes. After an unpromising start,
1982 should turn in a more respectable
record. The new .year begins with continuing
growth in defense spending, energy exploration and commercial building. Residential
builders and their supplying industries seem
likely to start on the recovery path, partly
because of a three-year backlog of pent-up
demand, but mostly because of a turnaround
in mortgage financing-evidenced
by rising
inflows of funds into lending institutions,
lower mortgage and construction-loan rates,
and hence sharp declines in the monthly
payments of new homebuyers. Farm and
nonfarm producers also should experience a
better year as inventories get pared down to
more reasonable levels. And Western consumers, like their counterparts elsewhere,
should benefit from growing real incomes
because of the package of tax stimuli now in
place and (above all) because of the nation's
continued progress against inflation.
William Burke and Yvonne levy
Wheat prices reached the lowest levels of the
past three years, on the heels of another record crop. Still, farmers expect a price turnaround soon because of a rise in foreign and
domestic demand, and hence a reduction in
carryover. Wheat exports could be about
one-fourth higher than last year's record,
reflecting heavy demand from Russian, Chinese and Indian markets. In contrastto wheat,
export demand for other products suffered
because of the strengthen i ng of the u.s.dollar. This led to rising inventories and lower
farm prices for cotton, nuts and other crops
heavily reliant on overseas sales. A special
complicating factor in the crop picture was
the medfly (Mediterranean fruit fly). California's $1 4-billion agricultural industry appeared threatened for a time by the medfly's
infestation, but major commercial-crop
3
U018U!4SEM.4Eln • uo8<3JO• EpEA<3N
• o4EPI
!!EMEH • E!UJoJ!IE:)
EUOZ! JV. E>jsEIV
CG)
. :iJ
BANKIN G DATA-TWELfTH fEDERALRESERVE
DISTRICT
(Dollaramountsin millions)
Selected
Assetsandliabilities
LargeCommercial Banks
Loans(gross,adjusted)
andinvestments*
Loans(gross,
adjusted)- total#
Commercialandindustrial
Realestate
Loansto individuals
Securities
loans
U.s.Treasury
securities*
Othersecurities*
DemanddepoSits
- total#
Demanddeposits- adjusted
Savingsdeposits- total
Timedeposits- total#
Individuals,part.& corp.
(Largenegotiable
CD's)
Weekly
of Daily Figures
Amount
Outstanding
12/9/81
155,206
134,122
40,961
55,488
23,388
2,274
5,802
15,282
41,049
29,498
30,110
88,039
79,470
34,777
Change
from
Changefrom'
yearago
Dollar
Percent
12/2/81
383
185
397
58
53
218
186
12
- 2,295
566
8,902
10,048
4,385
5,356
646
920
949
193
5,613
4,835
1,067
17,733
18,376
7,047
64
843
800
789
Weekended
Weekended
12/7/81
12/2/81
93
100
7
79
5
75
-
-
6.1
8.1
12.0
10.7
2.7
67.9
14.1
1.2
12.0
14.1
3.7
25.2
30.1
25.4
Comparable
year-ago
period
Member BankReservePosition
Excess
Reserves
(+ )/Deficiency(- )
Borrowings
Netfreereserves
(+)/Netborrowed
(- )
-
63
196
133
* Excludes
tradingaccountsecurities.
# Includesitemsnotshownseparately.
Editorial comments may beaddressed
to the editor (William Burke) or to the author . ... Freecopiesof this
andother FederalReservepublications can beobtained by calling or writing thePublic Infonnation Section,
Federal ReserveBank of SanFrancisco,P.O. Box 7702, SanFrancisco94120. Phone(415) 544-2184.
@FedFRASER