September 20, 1989
Summary
The economy in the West is expanding at a healthy pace. Twelfth
District business leaders' expectations of further growth have
improved during the past month. Annual increases in wages and in the
prices of most products are running at or below 5 percent. Consumer
spending growth continues healthy. Apparel sales continue strong and
a pickup in car sales during August buoyed the generally lackluster
sales of durable goods. Manufacturing industries report generally
satisfactory conditions, with little change in exports in recent
months. Crop yields are good in most parts of the District, and
exports of many products continue strong. Lumber mills in the
Pacific Northwest still face limited log supplies. Construction and
real estate activity are strong in most of the West, although
Arizona remains weak. Western bankers report increases in loan
volume and earnings, and stiff competition for deposits.
Business Sentiment
The most recent information on the economic mood of Twelfth District
business leaders indicates improvement in all categories. Although
almost three-quarters of respondents still expect weak growth in GNP
during the next four quarters, expectations for housing starts,
consumer spending, and the trade balance improved markedly during
the past month.
Wages and Prices
Annual price increases at or below the 5 percent range are reported
for automobiles (both foreign and domestic), building materials, and
natural gas. Respondents note larger price increases for processed
vegetables (up 20 percent), raw stumpage (up 64 percent), and Idaho
potatoes (up 30 percent). Grape and silver prices have fallen in
recent months, and easing capacity constraints for paper
manufacturers are putting downward pressure on paper prices.
Recently negotiated union settlements generally call for annual wage increases of 4 percent or less. Exceptions to this trend are nurses and teachers in several western cities who recently negotiated annual salary increases in the ten percent range. Businesses report difficulty hiring sufficient qualified labor in many parts of the District, including Oregon, southern Idaho, and agricultural regions of California.
Trade and Services
Retail sales continue to exhibit healthy growth, with particular
strength in apparel sales. One retailer notes that the primary
constraint to expanding his operations is the difficulty of finding
adequate labor in many locations. Sales of durable goods have been
less robust, although a car dealer notes that 1989 models moved well
in August as buyers tried to beat the price increases scheduled for
1990 models. Summer tourist activity is reported to have increased
over last year's level in Idaho, Utah, and southern California.
Manufacturing
Conditions in manufacturing industries generally are satisfactory,
with significant variations by product line and company. One
electronic component manufacturer reports that the order rate is
flat, while other high tech firms report strong growth and still
others announce cutbacks and layoffs. A heavy equipment dealer
reports that construction machinery sales throughout the West
continue to do "very well." Defense contracting activity continues
to slide. A cable television company faces delays in receiving
wiring and materials from manufacturers because strong demand is
creating bottlenecks in existing facilities.
Most Twelfth District manufacturers report little change in exports following the recent appreciation of the dollar. For example, international demand for aircraft is so strong that fluctuations in the exchange value of the dollar have little effect on aircraft exports. One banker notes that current exports were contracted in early August when foreign prices of U.S. products were more favorable. Nevertheless, an electronic component manufacturer reports that the dollar value of his export sales has fallen.
Agriculture and Resource-Related Industries
Crop yields and product quality are reported to be good in most
parts of the District, although weather conditions have hurt crops
in eastern Oregon, Utah, and pockets of southeastern Idaho. Exports,
buoyed by strong demand from Pacific Rim countries, are reported to
be strong for a wide range of agricultural products, including
almonds and corn. However, grain exporters report slow sales
following the recent dollar appreciation. Exports of beef continue
to increase, with one Asian country currently negotiating a large
order.
The environmental controversy regarding logging of old-growth forests, combined with continued strong demand for exported logs, has reduced log supplies available to mill owners. One large mill reports having a 10-month supply in the pipeline, compared with a 24-month supply a year ago.
Construction and Real Estate
Construction and real estate activity are reported to be strong in
most parts of the West. The pace of activity in Utah, where activity
had been weak for several years, appears to be picking up. Sales and
construction activity continue strong in California, Nevada,
Washington, Oregon, Hawaii, and in much of Idaho. Finding trained
construction workers is reported to be troublesome in most of the
region. Bidding wars to purchase single-family homes seen in
California a few months ago seem to have moved north to the Puget
Sound area in Washington. However, a southern California developer
notes that leasing activity is not keeping up with the pace of new
office building construction. Arizona remains weak, although the
virtual absence of building activity during the past two years has
begun to yield net absorption of commercial and industrial space.
Financial Sector
Twelfth District bankers report generally good conditions and
significant earnings growth. Loan volume is up, with particular
strength reported in real estate and mortgage lending. Deposits
continue to shift away from savings and demand deposit accounts and
toward certificates of deposit and money market demand accounts,
increasing the cost of funds to banks. Several bankers note that
competition for deposits is stiff, since customers are very
conscious of yields and account fees.