November 30, 1988
Summary
The Twelfth District economy continues to post healthy economic
growth. Although respondents to this Bank's Business Sentiment
Survey indicate that their expectations about the national economy
continue to deteriorate, most paint upbeat pictures of conditions in
their industries and regions. Increases in wages and prices are
noted for a wide range of products and industries, while recent
price decreases have occurred only in a few sectors. Although
consumer spending has been lackluster in recent months,
manufacturing activity continues strong. In the forest products
industries, demand for lumber and plywood has fallen slightly, while
capacity constraints are easing in paper production. Gold mining
activity continues strong in Nevada. The pace of construction and
real estate activity varies widely within the District, with
strength noted in California, Washington, Oregon, and Nevada;
markets in Arizona, Alaska, and Utah remain weak. Financial
institutions continue to report stiff competition for quality
borrowers, but industry profits appear to be holding up well.
Business Sentiment
Respondents reported further weakening in their expectations
regarding GNP growth during the next year. In the November survey,
53 percent anticipate that next year's growth will be weaker than 3
percent, compared with 43 percent in October and only 34 percent in
September. Less dramatic weakening in expectations was noted in
business investment, consumer spending, and the trade deficit.
Respondents indicated that their expectations about housing starts
during the next year have improved somewhat.
Wages and Prices
Reports suggest varying degrees of upward pressure on wages and
prices. Structure adjustments for wages and salaries are expected to
be close to 5 percent in most cases, which represents a slight up-
tick from the 4 to 5 percent range earlier this year. Some note
dramatic price increases. For example, one respondent notes price
increases of 10 to 14 percent during the past quarter for such "big-
ticket" items as large generators and steam boilers. Others report
more modest, but also more widespread, increases. For example, a
vintner reports increases in the costs of many materials, including
grapes, glass, corks, and labels, which have led to slight increases
in his company's wine prices. Newsprint prices seem to be
stabilizing after dramatic increases earlier in the year. Reports
indicate recent price decreases for natural gas, plywood, and used
cars.
Consumer Spending
Sales of soft goods have been relatively flat since late summer,
although one respondent notes some improvement during October and
early November. Weakening consumer spending also has been reflected
in reduced spending on advertising in both print and broadcast
media.
October was a sluggish month in the retail automobile business, with weak demand for new cars. Moreover, a general absence of buyers at wholesale used car auctions suggests that the used car market, which until recently had been very strong, may be weakening as well.
Manufacturing
Respondents generally indicate that manufacturing activity is
strong, particularly in the Northwest. Increased aluminum production
in the Pacific Northwest has cut the region's previous electricity
surplus in half. Capacity constraints are clearly evident in the
aerospace industry, as Boeing has a three and a half year backlog of
unfilled orders for commercial aircraft. A shortage exists for
titanium dioxide, a key whitening and opacity agent used in paints
and coatings. No additional production is anticipated until 1992,
but demand continues to grow, particularly offshore. As a result,
the price of titanium dioxide continues to escalate.
At the same time, the volume of orders continues to decline in the semiconductor industry. The book-to-bill ratio (orders received divided by orders shipped) has fallen in each of the past six months, and now stands at a two-year low of 0.96. Moreover, many producers are experiencing declining profits, and some layoffs and plant shutdowns have been reported.
Agriculture and Resource Related Industries
Demand for lumber and plywood has fallen in recent weeks, and prices
are eroding slowly. In contrast, log and timber prices remain firm
due to continued strong export demand.
Bottlenecks and capacity constraints are easing in the paper business. The operating rate for linerboard, which is used to make boxes, declined about 2 percent during 1988. Demand growth slowed to a 2 percent pace, while the capacity growth rate staged to 3.5 percent. This rate of capacity growth was much higher than estimates made in 1987 suggested it would be. Newsprint operating rates also are declining, with significant capacity growth.
There continues to be a great deal of activity in gold mining in Nevada, both in production and exploration. The decline in the price of gold has not been large enough to have a significant adverse effect on the industry.
Construction and Real Estate
Construction and real estate activity continues strong in
Washington, Oregon, California, and Nevada. One respondent from
central Oregon notes that some title companies in his area are
working their employees overtime to process the large volume of
transactions. Increases in California residential property values
have slowed substantially from the 15 to 20 percent rates seen
earlier this year.
In Utah, Arizona, and Alaska, however, construction activity remains at low levels. An Arizona developer reports that for the first time in twelve to fifteen years, property values are starting to decline. The average resale price for a single-family home in Arizona has fallen by more than 3 percent during the past year.
Financial Sector
Banks and thrifts report continued competition for quality loans.
Some report that, as a result, credit requirements are being relaxed
in order to attract additional business. Despite the relatively
small volume of loans being made, many financial institution are
experiencing improvements in net income over last year.