May 4, 1988
Summary
The Twelfth District economy continues to grow at a healthy pace,
and this Bank's survey indicates that condition have improved during
the past two months. Consumer spending is growing slowly, but car
sales have improved. Manufacturing, agriculture, forest products,
and mining continue to post healthy gains. Respondents report that
prices of many products have risen in recent months, but the
increases do not appear to be broad-based. Where wages are
increasing, in most cases the increases are less than 5 percent.
Real estate activity remains mixed, with strength reported in
California. Financial institutions report thin profit margins and
stiff competition for high-quality borrowers.
Business Sentiment
Respondents to the Twelfth District business sentiment survey expect
real GNP growth to be somewhat slower than 3 percent during the next
four quarters. The proportion of respondents anticipating growth at
or above three percent has grown since the last survey, due in large
part to expected strengthening of business investment. As was true
last time, respondents expect housing activity and consumer spending
to slow somewhat, while the trade deficit is expected to improve.
Sixty percent expect somewhat higher inflation, but none expects
inflation to worsen seriously. Most anticipate no change in the
unemployment rate, and the remainder are almost evenly divided
between expecting a higher or lower unemployment rate.
Consumer Spending
The pace of consumer spending growth is reported to be stable to
soft. Although some respondents noted growth rates a little slower
than they were before October 19, the March pace is reported to be
stronger than it was in January and February. Some Washington state
respondents report slight improvement across a broad range of
products, but spending on big-ticket items such as cars, homes, and
furnishings is reported to be slow in Arizona. Some southern
California retailers report sluggish appliance and home decorating
sales, despite booming new home sales there.
An auto dealer reports that domestic new car sales have firmed, and current inventories are satisfactory to tight. New domestic truck and minivan sales remain strong, with very lean inventories. Sales of Japanese imports, in contrast, are soft, with excessive inventories relative to sales. As a result, some manufacturers increasingly are using incentives to sell these vehicles. The used car market continues to strengthen, in terms of both activity and prices.
Manufacturing
Overall, manufacturing activity in the West continues at a healthy
pace. Aluminum producers have greatly expanded their output in
response to dramatic price increases. An electronics manufacturer
reports order and sales improvements of about 10 percent during the
first quarter of 1988.
However, cutbacks in defense spending are beginning to be felt in the West. Defense-related revenue at one large contractor fell 18 percent during 1987. While total sales for this firm are expected to set a record in 1988 due to strong demand for commercial aircraft, the pace of employment growth seems to be slowing. Job advertising patterns also suggest that aerospace employment growth is flattening out.
Agriculture and Resource Related Industries
Prices and general market conditions continue to bode well for most
western farm products. However, water shortages are a source of
increasing concern among western farmers, and recent rains have not
been sufficient to replenish reservoirs in many areas. Livestock
producers already are suffering. If irrigation is reduced this
summer, some permanent plantings could be lost, and crop yields
likely would fall.
Forest products companies and copper mines continue to benefit from strong prices and improved cost structures. In addition, oil drilling activity ran about 30 percent higher than Its year-earlier level throughout the first quarter.
Wages and Prices
More than forty percent of respondents reported little or no
increases in wages or prices. However, price increases have been
dramatic for some products, including aluminum, copper, wheat, logs,
wool, and steel. Finished soft goods from Europe and Japan
reportedly are prohibitively priced, even for the upscale U.S.
market.
Price increases for intermediate and finished products appear to have been less dramatic, although several respondents expressed concern about the possibility of substantial increases during the next six months. Consumer resistance has kept a lid on apparel price increases associated with the dollar's decline. One respondent noted that, while U.S. firms are encountering capacity constraints, substantial excess capacity abroad is likely to restrain price hikes. However, production bottlenecks in lumber and paper have shown up in increased newsprint prices.
Wages are increasing in some regions and industries, but rates of increase appear to be well under 5 percent in most cases. However, the 27 percent increase in California's minimum wage, effective July 1, could place upward pressure on wages for some California retailers, farmers, and service firms.
Construction and Real Estate
Housing activity has not recovered to the levels seen during
September and early October. One large firm reports that sales
activity improved slightly in March and April, but still lags far
behind last year's level in most markets, except in California. Real
estate development in southern California reportedly is continuing
aggressively, which some attribute to anticipated growth moratoria.
Sales of new homes in Arizona are reported to be slow. The fourth quarter of 1987 was the slowest in the last ten years for southern Arizona. Commercial, industrial, and multifamily construction in the state is reported to be at a standstill, except for some small retail projects.
Financial Sector
Overall loan demand appears to be unchanged, with respondents
divided as to whether demand is strong or weak, even in similar
markets. Thrift representatives report extremely thin profit
margins. They are flush with funds, but competition for quality
mortgage borrowers is stiff.