October 18, 1988
Summary
The economy of the Twelfth District continues to grow, with little
sign of a change in direction. Growth remains strong in the Pacific
Northwest and California, and the weaker economies in other parts of
the District show few signs of further slowing. The Business
Sentiment survey reveals that respondents are becoming more
pessimistic about future national growth and unemployment, but they
report few signs of an impending slowdown. Retail sales improved in
September, although they remain generally lackluster. Construction
has been strong in the Northwest, while slow in Arizona and Utah.
Housing prices continue to boom in Southern California, Washington,
and Oregon, although some slowing of sales is reported in Northern
California. Manufacturing remains strong in aircraft, electronics,
paper, aluminum, and machinery. Output in forest products industries
has slowed, but rains at a high level. Agriculture remains strong in
the District, while gains in refining profits have offset the
negative effect of falling oil prices on production in the energy
sector.
Business Sentiment
Continuing the trend reported last month, respondents have become
more pessimistic about GNP growth. Over 40 percent of the
respondents to the Twelfth District Sentiment Survey expect growth
to slow, up from 34 percent in September. Expectations about housing
starts remain low, with 83 percent anticipating further slowing, and
no respondents anticipating an improvement. Concern about inflation
has moderated since the last report, although concern about
unemployment is increasing.
Despite a drop in expectations about overall growth, the respondents did not report any immediate signs of slowing in the regional economy. The rapidly growing Northwest is expected to continue to boom, while the slower-growing areas see no signs of further slowing.
Retail Sales
Retail sales improved in the District in September from August
levels, but overall activity remains sluggish. Retailers report
softer-than-expected sales in September, although one respondent in
Washington reports a 14 percent rise in retail sales over last year.
Classified advertising volumes continue to drop in Los Angeles and
in the nation, indicating a slowdown in consumer spending and the
consolidation of the industry. Upward price pressure continues to
appear in imported products, but the soft retail market is making it
difficult to make price increases stick at the retail level.
Inventories are reported to be in line with desired levels.
Retailers note some problems attracting qualified sales people, and
register concern about a possible increase in the minimum wage.
Automobile dealers report price increases of 4 to 5 percent on both domestic and imported 1989 cars. A substantial number of 1988 models remain in dealer inventories, and GM has extended its rebates to eliminate the surplus. One respondent reports fairly high sales of new cars and light trucks in the Southern California area.
Manufacturing
Manufacturing activity continues to exhibit strength, particularly
in the Pacific Northwest. Pulp and paper production remains strong,
although some slowing in growth is being noted and some inventories
are rising. Several respondents report significant increases in farm
equipment purchases, with some shortages evident. Moreover
construction equipment sales are reported strong in Utah. The
slowing expansion of the wood products industry is being offset by
continued expansion of aerospace, aluminum, shipping, and electronic
industries in the Northwest, with Boeing near capacity and delivery
times lengthening. Some concern about semiconductor demand is being
voiced in the San Francisco area, and Arizona respondents remain
concerned about the effect of IBM's plant closure. Food processing
and canning industries are expanding in the District.
Construction
Construction and real estate activity are highly variable in the
District. Construction has been strong this past summer in
Washington and Oregon, and housing prices have increased sharply in
Southern California. The strength of the Washington economy is now
boosting prices in that region as well. Some slowing of sales has
been noted in the San Francisco area. In contrast, construction in
Arizona is called the slowest in 15 years, and construction, other
than for road building, remains depressed in Utah.
Resource Industries
Agriculture has had a strong year in the District. Yields in most
areas are average or down mildly, but the higher prices have more
than compensated. Inventories of table grapes are high, the tomato
crop has been damaged by heat, and almonds have been bothered by
insects, but prices have been strong. Livestock producers report
strong prices, although feedlot producers are losing profits to
higher feed costs. The wood products industry is still strong,
although production of lumber and plywood has begun to fall.
Excessive fire danger and environmental restrictions are limiting
access to forests, decreasing the supply of logs. The shortage of
logs has boosted prices in the Northwest. In the energy sector, the
recent drop in oil prices has had little negative impact so far.
Drillers are waiting to see if the lower price persists before
changing plans, while refiners and retailers are enjoying the
highest margins in years.
Financial Sector
Strong competition among banks for quality loans continues to be
reported in the District, particularly in the Northwest and
California. Conditions are improving in agricultural areas, with a
drop in non-performing loans and improved asset quality. Loan growth
is above expectations in Washington. Several respondents cited
problems competing with below-market offers by Savings and Loan
institutions.