March 20, 1986
Summary
The Twelfth District economy continues to grow at a moderate pace,
but performance across sectors remains uneven. Consumer spending is
still growing, although at a slower pace than was seen last fall. In
addition to their continuing problems with low prices and foreign
competition, some agricultural producers in California sustained
damage in the recent floods. The oil price drop, while welcome in
most parts of the District, is causing concern in oil producing
areas. The aerospace industry remains a source of strength, and
robust construction activity has received a further boost from lower
interest rates. The financial sector appears to be on the upswing,
but for some institutions delinquency rates and questionable asset
quality continue to cause concern.
Consumer Spending In most parts of the District, consumer spending is growing modestly. The growth rate in retail sales volume appears to have slowed in many areas, as no respondents reported that January 1986 sales volume was more than 5 percent above its year-earlier level. Auto sales were generally flat or down in January.
Agriculture Agricultural producers in most parts of the District remain troubled by low prices and foreign competition. For example, Washington's apple producers are experiencing price declines, induced in part by increased foreign imports of apple juice. Adding to these continuing problems, recent flooding in California caused substantial damage in some parts of the state. Preliminary observations suggest that the floods will probably not be a critical factor in determining farm income or prices this year. Some individual farmers, however, suffered severe damage. Orchard crops, particularly almonds, appear to have been among the hardest hit, although it will be months before the full extent of the damage is known. Because the trees were in bloom, some blossoms were destroyed either by flooding itself or by the rain and wind, while the weather impeded pollenation of some remaining flowers. In addition, pest control measures were interrupted, so many fear that pest problems will be unusually severe this summer. Some grain crops that had just been planted when the rains hit also appear to have suffered water damage. Vineyards appear to have suffered relatively minor losses, as they were in their dormant state when floods hit. The many field crops that had not yet been planted should also escape serious harm.
Manufacturing and Mining
Aerospace industries in the Twelfth District continue to prosper as
strength in both defense spending and demand for commercial aircraft
continues. However, companies that built problem components of the
Space Shuttle are concerned that the Challenger accident may lead to
program cuts and layoffs for their firms.
The dramatic oil price decline seen recently is welcomed in many parts of the District. However, there are already signs in Kern County (California) that drilling activity may slow further from its already low 1985 level. In Alaska, where oil revenues provide 85 percent of the state's income, and the state provides over 35 percent of all jobs, the governor has already taken steps to reduce state spending. Alaskan crude oil was recently selling for $12 per barrel, and it costs about $7.50 per barrel to pump and transport. Consequently, further price drops could be disastrous for the state of Alaska.
Although some early signs suggest that activity in the forest products industries may pick up soon, parts of Oregon that depend heavily on forest products continue to experience little economic growth.
Construction and Real Estate
In many parts of the District, construction activity has
strengthened, largely due to the favorable interest rate climate.
While some areas are adequately absorbing the supply of office and
apartment space, vacancy rates remain close to 20 percent in many
areas, including parts of Utah, Washington, and California. The
lower oil prices have, however, caused slowdowns in building both in
Alaska and in oil producing parts of California.
Financial Sector
Many thrift institutions in the Twelfth District enjoyed a banner
year in 1985 as a result of higher interest rate spreads due to
lower funds costs. Nevertheless, poor asset quality caused some to
founder. Mortgage volume continues to gain in strength, spurred by
lower interest rates. Moreover, consumer loans, in the form of
credit card, installment, and auto loans continue to show strong
volume in most parts of the District. Nevertheless, in some cases
delinquency continues to be a problem.
Several respondents believe that poor asset quality will continue to plague some lending institutions. Many argue that the quality of applications is improving, which in the long run should improve asset quality. However, a troublesome number of problem loans remain. Different banks have problems in different sectors of their portfolios, but most problems are in the agriculture, energy, LDC, consumer, and real estate sectors.