March 16, 1987
Summary
The Twelfth District economy continues to present an uneven picture,
across states as well as across sectors. The first two months of
1987 have seen weak retail sales, at least partially due to the tax-related buying binge at the end of 1986. Nevertheless, demand for
consumer credit continues strong in some areas. Capital investment
activity, while uneven, appears to be weakening overall. Prices of
many products are edging upward, particularly in sectors strongly
affected by exchange rates. Housing market activity has been robust
in fast-growing states such as California and Arizona, but slow in
hard-hit Alaska.
Consumer Spending
Retail sales have been weak during the early part of 1987, although
it is not yet clear how much of the weakness is fundamental and how
much is a result of the year-end tax-related buying binge.
California retail sales reportedly have shared in the weakness
during January and February.
Car sales have fallen since the first of the year in most parts of the District, as the tax-induced sales surge in December suggested they would. Auto sales decreased dramatically between December and January in California, Washington, Oregon, and Utah.
Manufacturing
Surveys of purchasing managers in Oregon and Arizona suggest that
prices of some products are starting to creep upward. In January,
the fractions of both surveys respondents reporting rising prices
increased while the proportions reporting falling prices declined.
Price increases have been most pronounced in sectors heavily
influenced by exchange rate fluctuation. Despite these inflationary
tendencies, many respondents pointed out that substantial market
competition and limited consumer demand should keep any price
increases modest.
Many firms plan to spend less on capital investments during 1987 than they did during 1986. These decreases are attributed to slow economic activity overall, to an increased focus on cost-cutting associated with recent restructuring, or to the reduced investment incentives under the new tax bill. One savings and loan plans to spend 15 to 20 percent less in 1987 than it did in 1936, while a survey of pulp and paper producers reveals that they plan to decrease investment spending by an average of 24 percent.
On the other hand, a survey conducted during January in Arizona suggests that investment spending in that state is likely to remain stable, since about 20 percent of the respondents said they would increase capital spending, while another 20 percent planned decreases and the remainder planned to continue spending at their 1986 levels. Throughout the District, investment spending is expected to increase for firms whose economic fundamentals indicate substantial investments, including an energy distribution company and a retailer that are expanding their territories, and a forest products firm newly flush with funds.
Agriculture and Resource Related Industries
The price of oil is expected to increase during 1987. Utilities
disagree as to whether higher oil prices would cause significant
increases in their rates. In the Pacific Northwest, the Bonneville
Power Administration faces enormous debt obligations and has
requested a 15 percent rate hike to pay them off.
An unusual mid-January frost in southern California caused extensive damage to avocado and citrus caps in Ventura and San Diego counties. The estimate of total damage currently stands at $60 million, although the California Avocado Commission reports avocado damage alone at $110 million. The damage, compounded by more generalized low yields, is likely to cause price increases for some fruits, vegetables, and nuts.
Western farmers should benefit from the last-minute trade pact agreed upon between the U.S. and the European Economic Community since it averts stiff European tariffs on such products as avocados (California), roasted nuts (California), and flower and vegetable seeds (Oregon), as well as further tariffs that could have been imposed on other specialty crops if the trade war had escalated.
Construction and Real Estate
California housing market activity has continued at a robust pace,
although the number of residential building permits issued in
January fell sharply from December's inflated level due to the
January imposition of a new school fee. The single-family segment of
the market remains healthy in most parts of the District. In
California, the median home price rose by 9.4 percent during 1986.
In Alaska, however, where the drop in oil prices has affected the
economy severely, single-family home prices reportedly fell 10 to 20
percent during 1986. The Alaska Housing Finance Corporation has
foreclosed on many homes, and in December 23 percent of its
condominium mortgages were in default.
Financial Sector
The performance of consumer lending in the West appears to be highly
uneven. Some banks and savings and loans are experiencing a
slowdown, which they attribute to a combination of high consumer
debt levels, refinancing of consumer debt through home equity loans,
and more favorable terms offered by auto companies' finance
subsidiaries. Other financial institutions continue to experience
growth in both installment and credit card outstandings. In some
cases, the increase seems to be driven by continued strong consumer
spending, but in other cases the growth is attributed the aggressive
marketing that has increased their market share. In most areas,
installment loans appear to be losing ground to home equity
instruments.