January 25, 1989
Summary
The economy of the Twelfth Federal Reserve District continues to
exhibit strength. Most respondents to the survey expect robust
growth in their industries and regions, although they have become
more pessimistic about the national economy. Resource industries
remain healthy, with strong growth reported in mining. Construction
is healthy in areas other than Alaska, Arizona, and Utah where real
estate remains in oversupply. Manufacturing is expanding in most
areas, led by aerospace, forest products, and electronics. Retail
sales posted healthy year-over-year gains.
Business Sentiment
Respondents to the survey are more pessimistic about future national
growth, investment, foreign trade, and inflation than they have been
at any time during the past year. Nearly 64 percent of the
respondents expect growth to slow, and 6 percent of the respondents
anticipate a recession during the next four quarters.
These sentiments about national trends contrast sharply with the respondents' own industry and area outlooks. Despite the negative outlook for the national economy, respondents generally report very strong conditions in their regions.
Resource Industries
Respondents to the survey are optimistic about the District's
agriculture. Recent rainfall has been near normal, raising hopes
that the drought is ending in the West. High cattle prices are
expected to keep profits high in cattle production despite rising
production costs.
Agricultural exports from the District are expected to climb this year. One respondent in the Northwest reports very strong export activity for processed food to the Pacific Rim countries. Foreign demand is growing for agricultural products as tariff barriers are reduced. Some concern is registered in California, where a threatened tariff war with the European Community could reduce California's exports of walnuts and dried fruits.
Mining is very strong in the District. Respondents report substantial new investment to open new gold, silver, copper, and phosphate mines and to refurbish existing mines. Exports of copper are being eliminated by rising domestic consumption. Energy industries are being buoyed by rising oil prices, although most new expenditures on plant and equipment are designed to refurbish existing fields, rather than to discover new reserves.
Respondents in forest products industries report some easing of capacity constraints as demand growth slows and new capacity comes on stream. Production of plywood and lumber has fallen by 3 percent, but pulp and paper production remains near capacity. One respondent reports that log inventories have been rebuilt, but another respondent reports that small mills are unable to compete with Asian customers for logs and may be forced to close.
Construction and Real Estate
Real estate and construction are reported strong in the District,
except in Alaska, Arizona, and Utah. Respondents in California
report continued year-over-year increases in property values and
sales activities. Nonresidential and residential construction remain
at high levels in Southern California, and commercial rents are
rising. The volume of residential sales is reported to be very
strong in Oregon. A respondent in Seattle notes that housing prices
are increasing at a 10 percent annual rate. Arizona remains
overbuilt. Although home prices have not changed significantly, one
respondent reports that the price of undeveloped land purchased in
earlier speculative buying has fallen by as much as a 40 percent.
Manufacturing
Manufacturing industries continue to expand in the West. Boeing is
building new plants in the Seattle and Spokane areas and is seeking
to boost production by one plane per month at existing facilities.
Capital equipment producers have become increasingly competitive in
world markets. Several respondents reported that domestic equipment
has been displacing foreign equipment. Caterpillar is said to be
near capacity, with one dealer in Utah reporting a 30 percent
increase in Caterpillar sales this year. Small electric power
producers in the Northwest plan significant additions to capacity
this next year. One respondent noted that the drought and increased
consumption forced utilities to draw on reserve capacity this past
year, signaling a need for new power production. One retailer
reports a shift of apparel manufacturing to west coast cities from
Asia because of higher imported apparel costs.
Electronics firms also are expanding. Several major electronics firms are building new plants in Idaho and other parts of the West. In California, however, sluggish sales of some electronic components have caused scattered layoffs.
Retail Sales
Retailers in the District report strong sales. Sales over the
Christmas holidays ran 7 to 15 percent above year-earlier levels in
most areas. Early indications for January show no slackening in
consumer spending. Apparel prices have been rising faster than the
general rate of inflation, and this trend is expected to continue
through the first half of 1989.