September 6, 1988
Summary
The economy of the Twelfth District continues to grow, although
there are concerns about some segments of the economy. The Business
Sentiment survey reveals that respondents are generally less
optimistic about conditions than they were in the previous survey.
Respondents, particularly those In the Northwest, expressed concern
about the effects of a slowdown in housing threatened by recent
increases in mortgage rates. Manufacturers of export-related
products, commercial aircraft, and electronics report strong sales,
although capacity constraints are becoming more binding. Agriculture
is performing relatively well in the District, with expectations of
continued strong export markets and strong prices.
Business Sentiment
Since the last report, respondents to the Twelfth District Sentiment
survey have become slightly more pessimistic about economic growth.
Expectations about housing starts are now at the most pessimistic
level of the year, with 86 percent now expecting significant
worsening. Respondents are still optimistic about further progress
in reducing the trade deficit, although they are less optimistic now
than at any point since April. Concern is growing about both
inflation and unemployment.
Retail Sales
Retail sales remain sluggish—particularly sales of women's apparel—but the outlook for the Holiday season is healthy. Upward price
pressure is cited as a result of higher import prices, but retailers
are having difficulty passing those costs along. Retailers report
some shortages of qualified sales persons and some upward pressure
on wages. Automobile dealers expect prices of domestic cars to rise
with this model year, although the mechanism will be through the
inclusion of more options as standard equipment, rather than through
direct price increases. One dealer also cites increasing
restrictions being placed on orders of domestic 1989 cars.
Manufacturing
Manufacturing activity is uneven across the District. Non-defense
aerospace and electronics firms are doing well in Washington, Idaho,
California, and Arizona, although cutbacks by IBM and a decision to
not relocate by Hughes has hurt manufacturing in Arizona. California
and Washington are being buoyed by the strength in Boeing's sales,
although the defense-related aircraft industry is facing cutbacks.
Forest products remain strong, but concern is mounting about a
possible collapse of demand triggered by declining numbers of
housing starts. One respondent reports that some softening of demand
has resulted in mills operating 7 to 8 percent below capacity, and
prices are lower for plywood and lumber. Heavy equipment
manufacturers report gains in farm equipment sales and in sales to
chemical and pulp and paper producers, although overall activity
remains relatively weak. Aluminum and paper production is at
capacity. Defense-related and durable manufacturing is picking up in
Utah.
Industries in the Pacific Northwest report shortages of some raw materials and rising costs of those materials, although the cost has not been fully passed along to wholesale prices. Shortages of entry level workers are reported in a number of areas in Washington and Oregon. Moreover, shortages of low-skill workers are a concern to apparel and agriculture producers in California because of the immigration bill. Respondents also report a 15 percent increase in newsprint prices in Los Angeles, and a sharp increase in the cost of imported electronic equipment.
Construction
Construction has been slowing in the District and industry observers
are concerned about further reductions in housing starts. Housing
starts are very weak in Utah, Alaska, and Arizona. Residential
construction remains healthy in California, Oregon, and Washington,
where prices continue to escalate at an extremely rapid rate.
Weakness in energy and housing has slowed construction in the
Intermountain region, although construction on mining facilities and
on highways has increased.
Resource Industries
Agriculture is performing relatively well in the District.
Production is off, but prices are up sufficiently to compensate.
Most respondents expect prices to steady or decline. Premium grape
prices are up sharply, although retail wine prices have not yet
risen. Cattle prices are rebounding and inventories are diminishing,
but feed and water costs remain high. Seafood products have heavy
inventories, and prices may decline. Mining activity is up sharply
in the District, with continued expansion of gold mining facilities
in Nevada. Energy activity remains sluggish.
Exports
Exports remain strong throughout the District. Manufactured
products, agricultural products, and forest products are all facing
expanding markets. No sign of weakening because of the rising dollar
are noted yet. Wine exports have doubled in the last two years.
Activity at Pacific ports is reported to be at very high levels.
Financial Sector
Respondents reported an increase in costs of funds and in loan rates
following the discount rate hike, but conditions appear to be
improving in the financial sector. Costs of funds and loan rates
have increased by 25 to 50 basis points. Competition for quality
loans remains strong in the faster growing portions of the District,
reducing margins for many banks. Conditions in the Intermountain
area and in agricultural areas are improving with the improvement of
the region's economy. Nonperforming loans have fallen 10 percent in
Idaho since the beginning of the year.