March 13, 1991
Summary
Economic conditions in the Twelfth District are reported to be
sluggish, but western business leaders' outlook for future economic
conditions improved for the first time since August 1990. Price and
wage increases remain moderate throughout the District. Retail sales
slowed substantially immediately following the outbreak of the Gulf
War, but activity has picked up since then. Manufacturing activity
is mixed in the West, with some firms reporting increased orders for
war-related products. The District's agriculture and forest product
industries continue to face difficult conditions. Construction and
real estate activity remains slow in much of the West. District
financial institutions report a drop in loan demand in the past
several months.
Business Sentiment
The economic outlook of western business leaders improved slightly
in February, although expectations about future economic growth
remained pessimistic. Seventy-three percent now foresee a national
recession in the coming year, compared to 81 percent in January and
75 percent in November. Expectations about business investment,
housing starts, and consumer spending improved for the first time
since last August. Business leaders' outlook for inflation continued
to improve, with 53 percent now expecting inflationary pressures to
ease in the coming year. Almost 60 percent of respondents now
project improvement in the foreign trade balance during the next
twelve months, compared to 29 percent in January.
Wages and Prices
Reports from throughout the Twelfth District indicate that prices
have stabilized recently, and wage increases remain moderate. Prices
have declined for many agricultural and natural resource products,
including livestock, wheat, timber, natural gas, and oil. Increases
in prices for department store merchandise remain in the 3 to 4
percent range. Health care costs, however, continue to rise at a 15
to 20 percent rate. Recent union contracts for a wide range of
industries in the Northwest brought wage increases from 2 to 4
percent. Wages in financial institutions are reported to be rising
at or below last year's rate.
Retail Trade and Services
Twelfth District retail trade activity declined sharply immediately
following the outbreak of the Gulf War in mid-January, but many
reports indicate a slight rebound since then. One District auto
dealer reported that sales came to a halt for 3 or 4 days after the
start of the war, but that showroom traffic has picked up recently.
Similarly, department store sales softened in mid-January, but also
have improved in recent weeks. The war reportedly further eroded
consumer confidence, leaving buyers more cautious. Reports indicate
that Southern California continues to post the weakest retail sales
in the District.
The rise in consumer uncertainty also has affected the tourism industry in some parts of the West. In Hawaii, tourism has dropped off sharply, leaving the hotel occupancy rate down approximately 30 percent.
The District's media industry is facing difficulties as a result of weakening economic conditions and the war. Newspaper advertising, particularly national accounts, continues to fall off significantly at the same time that costs are rising as a result of expanded Gulf War coverage. Television advertising also has dropped off, as advertisements were canceled at the start of the war, and expanded network coverage cut into available advertising spots.
Manufacturing
Manufacturing activity in the West is reported to be mixed. Defense-
related manufacturing remains weak overall, although some companies
report a pick-up in activity related to the Gulf War. War-related
orders range from engines for missiles to processed food products.
Several District manufacturers report increasing interest from
overseas buyers, including Eastern Europe, Latin and South America,
and the Middle East. Business investment plans for many
manufacturing firms in the District remain cautious.
Agriculture and Resource-Related Industries
Difficult conditions continue for the District's agriculture and
forest products industries. The fifth year of drought in California
will result in reduced production of field crops and increased
production costs. Higher feed prices and lack of adequate grazing
land will force cattle into feedlots early, lowering livestock
prices. California farmers with access to Colorado River or
Sacramento Delta water, or who have their own wells will likely come
through the drought in good shape. For many others, reduced
production may be partially offset by rising prices for their
products.
The District's wood products industry continues to weaken in response to slow economic activity. Western lumber production is reported down 24 percent in the first five weeks of 1991 from the same period a year ago. Orders and shipments of pulp and paper products also are reported off significantly from last year. Soft demand has left prices lower, with lumber prices down 8 to 12 percent, and pulp and paper prices off 19 percent from a year ago.
Some firms in the Northwest with expertise in oil spill clean-up will be involved in the effort to handle the spill in the Persian Gulf.
Construction and Real Estate
Construction and real estate activity remains weak in much of the
West. In California and Washington, both commercial and residential
construction continues to soften. Developers report increasing
difficulty in obtaining financing for real estate projects. Slowing
real estate sales have cooled housing prices in Los Angeles and
Seattle. In Salt Lake City, however, home prices and rental rates
continue to rise. New apartment buildings in Oregon report vacancy
rates of less than 2 percent.
Financial Institutions
Financial institutions in the District report difficult conditions.
Loan demand in much of the West has slowed significantly. Bankers
admit to tightening credit standards, and report that highly
leveraged companies and speculative real estate projects will face
difficulty obtaining credit. The bankers insist that loans are
readily available to borrowers with strong balance sheets and solid
cash flow. Many reports suggest that weak economic conditions
combined with closer regulatory scrutiny have caused this tightening
of credit standards.