June 15, 1988
Summary
The Twelfth District economy continues to expand, although the pace
of growth appears to be slowing. The business sentiment survey
reveals that, on average, growth expectations were higher than in
the last report, although an increasing number of respondents are
concerned about the possibility of recession. Capacity constraints
are noted in a number of industries, and investment plans to expand
capacity are reported to be cautious. Agriculture and resource
industries continue to strengthen, although the forest products
industry is threatened by possible cutbacks in housing starts and
the reduced availability of raw materials. Interest rate increases
are causing concern in several sectors, but the expected decrease in
loan demand has not yet materialized.
Business Sentiment
Respondents to the Twelfth District business sentiment survey expect
real GNP growth to be about 3 percent over the next four quarters,
although 8 percent now expect a recession during that period.
Respondents have become slightly more optimistic about the trade
deficit and more pessimistic about inflation, with 77 percent now
expecting a slight worsening in inflation.
Capacity Constraints
Respondents noted capacity problems in a variety of industries.
There is concern about shortages of farm equipment, with demand
expected to rise 5 percent this year. Delays are noted in obtaining
chemicals, and respondents report chemical production in excess of
stated capacity in some areas. Additional delays in manufacturing
are blamed on shortages of raw materials and heavy machinery
(including printing machinery). Aerospace manufacturing in the
Northwest also is reported to be at capacity, and back orders for
computer parts have been increasing.
Respondents report a reluctance to expand capacity by those firms facing constraints, although our survey found that most respondents continued to expect an improvement in total business investment spending this year. Manufacturers are reported to be retooling some plants to increase capacity, but are reluctant to make large investments. Several respondents report that manufacturers are seeking additional capacity through mergers and acquisitions rather than through new investment. Vacant plants in Idaho and eastern Oregon are being converted to new uses, and two aluminum plants idled last year have returned to production. Agricultural producers are using their increased incomes to reduce debt, rather than to expand operation. Some investment is reported in western food processing plants.
Resource Industries
Agricultural conditions continue to improve in the District, led by
a strong cattle market. Cattle producers report the best conditions
in 15 years and expect continued strong growth in prices and demand
this year. High prices also are reported for tree fruits, grapes,
and grains. The lack of moisture is causing some cattle producers to
reduce herd size and may reduce crop yields in the Northwest, but
sufficient supplies of irrigation water are expected in California.
Respondents in the forest products industry are beginning to note a slowdown. Shortages of logs remain a problem for small mills, and recent environmental actions are further reducing available supplies of timber. Concern about future demand also is mounting because of a possible slowdown in housing starts and a decrease in Japanese demand for lumber.
Mining continues to perform well, with increased exploration and investment noted in Arizona and Nevada. Energy extraction remains stable and above year-earlier levels.
Construction
Construction appears to be slowing in the District. Weakness is
reported in single-family and multifamily construction in Utah and
Arizona, and construction remains depressed in Alaska. Although
construction activity remains strong, some slowing of residential
construction is being reported in Oregon and Washington, and
continued high levels of construction in California are attributed
by some respondents to attempts to beat threatened growth moratoria.
Retail Sales
Retail sales have remained relatively sluggish, although recent
trends suggest some improvement. Retailers report increased costs of
foreign soft goods, but the major weaknesses are in women's apparel.
Auto dealers report strong sales of used cars and a shortage of
trucks. Dealers also report deteriorating competitiveness of foreign
cars vis a vis domestic cars. Sales of new cars remain moderate,
although some respondents report slow sales as consumers wait for
new incentive programs.
Banking
Respondents in the banking sector report few effects of higher
interest rates at this point. The number of loan applications has
slowed in Utah and Arizona, and a slight decrease in loan
originations is reported in Oregon and some parts of Southern
California. Increased loan demand to lock in current rates is
reported by some bankers. Overall, however, higher mortgage rates
appear to have caused a shift from fixed-rate mortgages to ARMs,
rather than a decline in total demand.