December 6, 1989
Summary
Economic conditions continue to be generally healthy in the Twelfth
Federal Reserve District. Nevertheless, western business leaders'
expectations about future growth have deteriorated somewhat during
the past month, particularly regarding business investment. Wage and
price pressures continue modest in most cases. Consumer spending is
healthy but not growing rapidly, with weakness noted in auto sales.
Manufacturing activity is reported to be mixed, with some producers
at capacity and planning expansions, while others report slower
orders. Conditions in most resource sectors are satisfactory, with
strong growth in agricultural exports. Construction and real estate
activity is reported to be strong or improving in most of the West,
except Arizona. Banks and thrifts continue to compete vigorously for
deposits, while loan demand remains strong for most categories and
regions.
Business Sentiment
Twelfth District business leaders' expectations regarding GNP growth
have deteriorated slightly during the past month, as three quarters
of the respondents now anticipate that growth will be slower during
the next year than its historical average. Expectations deteriorated
particularly sharply for business investment. Only 15 percent expect
stronger investment, compared with 30 percent last month, while 59
percent now anticipate weaker business investment, compared with
only 30 percent of last month's respondents.
Wages and Prices
Wage and price pressures continue modest in most cases. Reports of
wage and price increases of up to 4 or 5 percent are common.
Retailers report that competition and price-conscious consumers are
keeping a lid on retail prices. 57,000 machinists at Boeing recently
agreed to a 10 percent increase in base wages over three years, in
addition to cost-of-living adjustments.
Consumer Spending
Consumer spending is healthy but not growing rapidly. Department
store sales are reported to be in line with expectations, with
intense price competition. The financial problems of some department
store chains are causing concern in the industry. A car dealer
reports that customer traffic declined about 40 percent during the
first half of November, to the lowest level of the year. Customers
are not responding to incentives, but it is not clear whether this
is an early sign of further weakening, or simply a payback for the
strong sales of August and September. All product lines are
affected: imports and domestics, new and used.
Manufacturing
Manufacturing activity in the West is mixed. An Idaho respondent
reports that production in his area is at capacity, and several
firms (particularly food processors) plan expansions. Food
processing activity in California also is strong. The Boeing strike
resulted in some lost commercial aircraft production. but the huge
order backlog should yield healthy activity as work resumes in the
wake of the recent settlement. A construction and engineering firm
reports that while demand from manufacturers continues to grow, the
rate of growth has slowed in recent months.
Several respondents, however, note slower orders for manufactured goods. Moreover, a heavy equipment manufacturer reports that export sales were down 1 percent during the third quarter compared to their year-earlier level. A paint and coatings manufacturer reports that most of the companies his firm deals with have experienced a slowdown during recent months. Recent performance varies widely among high-technology manufacturers, as one respondent reports that lower chip prices have hurt semiconductor producers.
Agriculture and Resource-Related Industries
Conditions in most resource sectors are satisfactory. Gold prices
are up. Metals industries are producing at high levels, although
they are not growing. However, the forest products industries seem
to be slowing somewhat. Lumber orders and log exports both have
fallen during the past year, with recent activity 10 to 15 percent
below year-earlier levels.
Agricultural industries report healthy conditions, with strong export growth. California farm exports are expected to be about 10 percent higher in 1989 than they were in 1988, with exports of nuts, fruits, and vegetables particularly strong. Livestock operators are doing well, with steady increases in exports. Wine exports are starting to "take off," particularly to the U.K and Japan. The extent of earthquake damage suffered by food processors and by flower and nursery greenhouse operators in Watsonville, Gilroy, and Hollister remains unknown.
Construction and Real Estate
Construction and real estate activity is reported strong or
improving in most of the West outside Arizona. Building activity in
Nevada continues at a vigorous pace, and home values in the Puget
Sound area are up by as much as 30 percent over their year-earlier
levels. Increases in building and sales activity, as well as in
property values, are reported in Oregon, eastern Washington, Idaho,
and Utah. California's coastal markets have cooled since the
frenetic pace seen a few months ago, but values continue to exceed
their year-earlier levels by 10 to 15 percent, and activity in less
expensive parts of the state is very strong. Arizona, however,
continues to suffer from overbuilt markets for apartment, office,
retail, and industrial space.
Financial Sector
Banks and thrifts continue to compete vigorously for deposits, while
loan demand remains strong in most categories and regions. However,
the rate of growth in lending appears to have slowed from the robust
pace seen earlier this year. A California banker reports that the
rate of growth in consumer lending slowed in September and October,
as home equity lending grew more slowly and credit card borrowing
continued to be slow. An Oregon banker notes some decrease in demand
for non-mortgage credit. Several bankers report that delinquencies
are down from their year-earlier levels.