June 25, 1985
The economy of the Twelfth District, in general, continues to be healthy. Activity weakened by the continued strength of the dollar appears to have been partly offset by the stimulus provided by recent declines in interest rates. The semiconductor industry, for example, has weakened considerably since last year but home construction activity is proceeding at long-term trend levels. Retail sales activity also has been generally vigorous, although there is considerable variation in retail sales growth reported within the District. The agricultural sector, although still struggling to overcome the problems of the high value of the dollar and extensive debt obligations, does not appear to be losing ground. The forest products industry and the mining industry also continue to be weakened by the strength of the dollar and by local production cost problems. Fortunately, in those states in which these industries are important, growth in the service sector or in manufacturing activity has helped to avoid the more serious implications of continued weakness in these industries.
Consumer Spending
The available data on retail sales activity presents a mixed
picture. In the far west, recent retail sales activity is up
comfortably from last year. Department stores in southern
California, for example, report an increase of 10 percent over last
year. In the intermountain states, however, retail sales activity
has been less healthy. Idaho, for example, reports a sharp decline
in retail sales over the past two months.
Automobile sales also are reported as being up from last year due in part to consumer awareness of increased price competition as the result of elimination of Japanese import restrictions. In California last month, the import share of the automobile market was above 50 percent.
Manufacturing and Construction
Manufacturing activity in the Twelfth District generally has
experienced the slowdown exhibited nationwide and employment has
been maintained primarily by growth in the service sector. The most
important development has been in the regionally significant high-
technology industries which are now displaying considerable
weakness. In California, Idaho, and Utah, significant layoffs and
decreases in earnings have been reported. The "book-to-bill" ratio,
an important indicator of the prospects for future activity in the
semiconductor industry, continues to be disappointingly low. Only
the Arizona semiconductor industry reports a significant recovery in
this leading indicator.
Construction activity generally is strong. In California, housing starts are running at the rate of 230,000 units per year, up 4 percent from the first quarter of 1984. In Utah, housing starts are down from last year, but non-residential construction activity is up nearly 40 percent. Generally speaking, vacancy rates in manufacturing facilities appear to be drifting upward, whereas vacancy rates in commercial structures are declining. This has been particularly important in the overbuilt Wilshire corridor in Los Angeles.
Despite relatively healthy construction activity, the forest products industry in the Pacific Northwest continues to be plagued by local labor problems, strong competition far plywood products from Japanese imports and competition for other wood products from Canada. Lumber exports out of the Port of Portland decreased by 58 percent between the first quarters of 1984 and 1985.
Agriculture and Mining
Although western farmers continue to face difficulties because of
weak export markets and high debt burdens, recent modest increases
in potato, bean, and livestock prices have been helpful. In
addition, smaller cattle and hog inventories in the District suggest
that there nay be future improvement in prices. Wheat farmers,
however, continue to have faced serious difficulties in world
markets despite some recent slight improvements in price. The
reduction in interest rates that has occurred recently, however, is
seen as providing some assistance to farmers until world product
prices strengthen. In California, vegetable and other row crop
farmers have been facing less severe difficulties than their midwest
counterparts, but have complained recently of sharp increases in
transportation costs.
Mining and smelting activity in the district continues to be weak, again largely because of the strength of the dollar and competitiveness of foreign supply. In Utah, the recent closure of a major copper mining complex was a serious blow to the industry, but was offset in the aggregate by growth elsewhere in the Utah economy. The unemployment rate in Utah actually fell between April and May from 6.5 to 6.2 percent.
Financial Sector
The recent decline in interest rates has spurred commercial and
mortgage loan demand at district financial institutions. The
increase in demand has been most marked in the consumer loan and
mortgage sector, where some institutions are now offering adjustable
rate mortgages with initial rates below 10 percent. Commercial loan
demand had grown extremely rapidly in the latter half of 1984 so
that the 6 percent increase in 1985 over 1984 thus far seems modest
in contrast. Nevertheless, the decline in interest rates is a sign
of optimism for many lenders, except those with undiversified loan
portfolios in the agriculture and forest products sectors.