September 8, 1987
Summary
Overall, economic activity in the Twelfth District continues at a
healthy pace, although Alaska, Idaho, and Utah do not share in the
current prosperity, and the pace of construction activity continues
to weaken in many parts of the District. Consumer spending is
steady, and high-technology manufacturing activity appears to be
picking up. Lumber producers continue to enjoy strong prices and
demand, while oil-producing regions are benefiting from recent price
hikes. Construction activity continues mixed, among regions as well
as among building types. Many financial institutions are
experiencing substantial changes in their portfolio mixes, away from
consumer credit and toward home equity loans.
Consumer Spending
Consumer spending patterns have not changed appreciably in most
parts of the District during recent months, with most respondents
describing overall sales as "flat" or "unchanged." Strength in car
sales varies geographically, and within market areas sales generally
are stronger among used cars and smaller cars, including Korean
imports. In most areas, apparel, housewares, and small appliances
are selling well. Shopping malls and department stores in southern
California, Oregon, and Seattle report sales growth and express
optimism regarding fall sales.
An Arizona survey suggests a broad-based decline in purchases and planned purchases of consumer durables in that state, consistent with the slowing pace of activity there. Consumer purchases since the last survey declined in most spending categories, but the proportion purchasing home appliances increased from 24 percent to 31 percent. The proportion planning to purchase automobiles during the next six months dropped from 42 percent of the respondents in July 1986 to 28 percent in July 1987, while the fraction planning to buy electronic products and tools dropped from 43 percent to 33 percent. Declines of 10 to 15 percentage points also were reported for household furnishings and home improvements, with home appliances experiencing a smaller decline.
Manufacturing
The long-anticipated turnaround in the semiconductor and electronic
equipment industries appears to be materializing at last but, in the
words of one respondent, it is a "slow creep-out rather than a rapid
turnaround." Orders and shipments are stronger overall, but
increased demand currently is concentrated in computers and office
equipment, communications, and instruments. One Portland-area firm
has announced plans to double capacity at one of its plants, and
another is re-examining old plans to build a new $130 million
silicon-wafer plant. Moreover, 17 percent of respondents to an
Arizona survey planned increased capital spending, an improvement
from recent quarters when virtually none planned spending increases.
The same survey revealed that 57 percent of respondents expected to
increase employment during the coming months, and the remaining 43
percent plan no changes. However, many firms are increasing
production by utilizing existing plant capacity and labor resources,
which has limited plant expansion and additional hiring. In
addition, continued offshore migration of production, particularly
of standard memory devices, is limiting U.S. gains.
Several respondents note that exports to both Europe and Japan have strengthened. A Washington banker argues that the improvement also is due to new product designs and redesigns of existing products reaching the production stage, and that continued improvement in this area depends critically on activity at large regional electronic and electrical equipment firms.
Agriculture and Resource Related Industries
Most Idaho lumber mills reported that they were operating at
capacity, with 6 percent fewer employees than a year ago. Softwood
lumber exports to Europe and Japan for the first five months of 1987
were up 16 and 12 percent respectively from the same period in 1986,
while log exports rose 11 percent. Exchange rate considerations, a
surge in housing starts in Japan, and increases in log demand from
China and Korea account for much of the improvement. Canadian lumber
imports for the first five months of 1987 were 2.8 percent lower
than they were in 1986.
Some oil equipment firms finally are operating "in the black," as the number of drilling rigs has been increasing for the last eight to nine weeks. In Kern County, the number of drilling rigs has increased during each of the last four months, and 51.5 percent of the rigs are working, compared with only 27.5 percent of rigs a year ago.
Construction and Real Estate Construction activity in the Twelfth District continues to be mixed, with particularly weak activity in economically struggling areas, and multifamily construction weakening throughout the District. In California, the number of residential construction permits year-to- date through July stands 11.5 percent below last year's level, while the value of nonresidential construction awards for the first seven months of the year remains 14 percent above the year-earlier level despite deterioration during June and July. The number of housing permits and mortgages in the Seattle area has declined in recent months, and sales of both new and existing homes have fallen in eastern Washington. In Utah, total construction value for the first six months of the year was down 15.7 percent from last year's level, after June declines of 25 percent in the number of new single-family construction permits and 45 percent in nonresidential valuation.
Financial Sector
Declines in consumer loan volume and in credit card usage compared
with last year were reported in most parts of the District, but were
not universal. At a Washington bank, consumer loans outstanding
advanced at over a 10 percent annual rate between April and July,
following net paydowns in the first part of the year. Moreover, an
Arizona banker reports that credit card usage through the first
seven months of the year rose 21 percent from the comparable period
last year, and installment credit rose by 6.6 percent over the same
period.
Many respondents attributed the general decline in consumer credit volumes to the new tax law, which eliminated consumer interest deductions, causing increased use of home equity loans and home equity lines of credit. An Oregon bank reports that credit card debt has grown only minimally, and auto loans have been flat, while the use of home equity credit lines has increased by 17 percent in the last year. There is little evidence that consumers are drawing down savings accounts to purchase durable goods. One large California bank reports that its passbook savings volume has advanced significantly since December. A community bank in the San Joaquin Valley also reports increases in savings account balances, while one Arizona bank reports that its savings account balances are up 15 percent. However, contradictory evidence comes from a southern California Savings and Loan, where savings inflows have been weak for the last seven months.