May 4, 1987
Summary
Most developments in the Twelfth Federal Reserve District have been
positive, despite lingering weakness in some sectors and regions.
Consumer spending activity varies with local economic activity, as
the prosperous, and generally urban, parts of the District report
strength, while many rural and inland areas report weakness.
Manufacturers report that improved exports have boosted orders and
sales. Farmers' fortunes are mixed, as prices of some agricultural
products have risen while other prices continue to decline. Lumber
producers continue to benefit from strong domestic and foreign
demand. In most parts of the District, single-family homebuilding is
expected to remain strong, with little change from last year's
robust pace. As bankers' cost of funds has risen in recent weeks,
many banks have increased their loan rates and most others expect to
implement rate increases on some instruments soon.
Consumer Spending
Retail sales activity have been mixed in the West. In regions that
are healthy economically, such as California, sales growth
continues, and sales of both imported and domestic cars have been
strong. Utah, where economic activity has been relatively stagnant,
presents a sharp contrast. March retail sales were reported to be
down 3 to 4 percent from their year-earlier level, and auto sales,
while up from March, still stood substantially below their year-
earlier level.
Manufacturing
Respondents expressed concern about the potential detrimental
effects of a trade war with Japan. Japan is by far the most
important export market for western products. One Arizona
electronics manufacturer exports about 30 percent of its product to
Japan. U.S. companies that have shifted manufacturing activities to
Japan also expressed concern about the potential impact of more
stringent tariffs.
At the same time, some argue that the escalating trade friction has opened up Japanese markets to U.S. firms. In addition, both Taiwan and South Korea, fearing possible retaliatory actions against them, have taken significant steps to reduce tariffs and duties on a large number of items. Moreover, Japanese firms can be expected to continue shifting more production to the U.S., with California a prime candidate for that investment. Finally, if allegations about semiconductor "dumping" are true, and if U.S. trade measures curtail dumping, western electronics firms should benefit.
Agriculture and Resource Related Industries
Prices for cattle and sheep have increased and reportedly are
reaching profitable levels. However, ranchers remain cautious
because higher prices tend to attract foreign imports in both
markets. Prices of apples, potatoes and milk also have risen. Wheat
prices, while up slightly in recent months, remain 22 percent below
their year-ago levels. Weakness in hay, grain, and bean prices drove
the Idaho farm price index down substantially in February, despite
the improved livestock prices.
Lumber demand continued strong through the early part of the year. Through February, orders taken by western lumber mills were up 21 percent over a year ago and production was up 17 percent. Lumber inventories, which were relatively low entering the year, have increased and firms appear satisfied with current inventory levels. Lumber exports continue to show large increases over a year ago. A 15 to 25 percent increase in export volume to Europe during the first quarter, plus higher products prices, have put dollar sales well ahead of last year's pace. Lumber exports through the Port of Portland reportedly increased 500 percent while log exports rose 200 percent between January 1986 and January 1987.
Box shipments, which track industrial production, were up 2.6 percent through February over the first two months of 1986, while linerboard production rose 6.6 percent. Domestic demand increased by 6.7 percent, compared with a 5.6 percent increase in export demand.
In Utah, the reopening of the Kennecott Copper facility pushed the mining industry to its first year-to-year employment growth in nearly three years with a 1.2 percent employment increase.
Construction and Real Estate
Most respondents expect that single-family home building will remain
strong during 1987, with little change in either direction from its
robust 1986 level. Some express concern that increases in mortgage
interest rates could dampen building activity in coming months, but
others argue that modest rate increases should not affect housing
demand significantly. In areas with weak economies, including
Alaska, Idaho, and some rural areas in Utah, California, and eastern
Washington and Oregon, the slow pace of building activity is
unlikely to pick up unless general economic activity improves.
Virtually all respondents expect slow multifamily residential construction activity due to past overbuilding and high vacancy rates. Consequently, the total number of housing units built in 1987 may fall below its 1986 level in many areas.
Financial Sector
Most surveyed bankers are under increased pressure to raise interest
rates due to recent increases in the cost of funds. Some already
have raised rates, while others anticipate doing so if the cost of
funds stabilizes at its current higher level or continues to rise.
However, banks in economically hard-pressed areas are reluctant to
raise rates, citing demand pressures. While some banks anticipate
across-the-board increases in rates, most expect greater increases
in business and real estate loan rates. Competition for consumer
loans, from financing subsidiaries of auto companies, should
constrain increases in consumer rates for some banks. The squeeze
between the high cost of funds and tight demand has reduced margins
substantially.