May 6, 1986
Economic activity in much of the Twelfth District has shown some improvement during the past month. Most of the District should benefit from the recent plunge in oil prices, although oil producing regions have been hit hard. Consumer spending, while no longer growing at its previous high rates, remains high and shows no sign of slowing. Lower interest rates have generated renewed optimism in the construction and wood products industries, while the slump in high tech appears to have bottomed out. Weakness continues, however, in the agriculture and mining sectors. Nevertheless, strong loan volumes suggest that the overall mood is optimistic.
Trade and Services
Retail sales continue strong in much of the West, with Idaho, Utah,
and Oregon showing increased strength in sales volume. While
respondents in most parts of the District anticipate improved trade
due to lower oil prices and interest rates, Alaska's oil related
problems could hamper trade in parts of Washington and Oregon, where
Alaska is an important market. In most parts of the District, lower
oil prices have resulted in reduced retail gasoline prices. Lower
travel costs, together with the lower value of the dollar and fears
of terrorism abroad, are expected to boost tourist spending
throughout the West this summer. Businesses in the Pacific Northwest
expect particularly strong gains due to the World's Fair in British
Columbia.
Manufacturing
Aerospace industries continue to prosper, as high defense contract
volumes combine with strong commercial aircraft demand to boost
activity. While the electronics sector appears to have weathered
the worst of its downturn, employment levels in many areas remain
below their year-earlier levels. Employment is unlikely to expand
during the initial stages of the industry's recovery because many
firms continue to operate with excess capacity.
Other manufacturing industries, such as aluminum, are likely to benefit from reduced energy costs. In some cases, these lower costs could make previously unprofitable plants profitable for the first time in years.
Resource Based Industries
The sharp reduction in oil prices is wreaking havoc in energy
producing parts of the Twelfth District. In Alaska, drilling
activity has been reduced substantially. In California and Utah,
drilling and pumping activity is down sharply, with rig counts in
most oil producing areas between 20 and 80 percent below their year-earlier levels. Respondents in Alaska, Utah, and Kern County
(California) report that their governments have already lost
millions of dollars in tax revenue due to the lower oil prices.
In contrast, the forest products industry currently is posting its best performance in several years. Lower interest rates and the reduced foreign exchange value of the U.S. dollar have boosted prices of some products to 22 percent above their year-earlier levels, while lumber orders at West Coast mills reportedly reached a record level during the week of March 8. One respondent reports that lumber mill inventories are at their lowest level in two years. Although lumber trade volume through some Northwest ports had not yet picked up in February, industry sources remain optimistic about future prospects.
Sustained weakness in copper prices continues to be a problem in Utah and in parts of Arizona. In contrast, gold mining is a healthy industry in Nevada, which currently produces more gold than does any other state.
Agriculture continues to show weakness due to low prices and increased competition from abroad. Despite the overall weakness, some crops, including many fruits and vegetables, continue to be quite profitable.
Construction and Real Estate
Lower interest rates have spurred real estate and construction
activity in most parts of the Twelfth District. Home resales and
residential and commercial construction are all strong, although the
boom is not shared by oil producing parts of the District. In
Alaska, where the government has in the past funded huge
infrastructure construction projects, the building sector has been
hit particularly hard.
Financial Sector
Mortgage loan originations continue to grow, spurred by a rush to
refinance existing home mortgages taken out when rates were higher,
as well as by renewed buying activity. In most of the District,
consumer loan volumes continue to be strong. In addition, commercial
loan volumes have picked up, apparently spurred by low interest
rates and, in Oregon, by an improved economic outlook as well.