August 5, 1992
Summary
Economic conditions remain weak in California, but are improving
moderately in other District states. In California, further cutbacks
are reported in aerospace and defense-related manufacturing. In
addition, the state's fiscal problems threaten layoffs in education
and other government services. Outside of California, moderate
improvement is reported in retail trade, non-defense manufacturing,
and residential construction. The strongest conditions remain in
Utah and Idaho, but drought is threatening agriculture in certain
sections of the Pacific Northwest. Overall business sentiment
declined since our last report. Little upward pressure on wages and
prices is reported.
Business Sentiment
Twelfth District business leaders are less optimistic than they were
at our last report. Only one-third of our respondents now expect the
real economy to expand during the next four quarters at a rate of at
least 2.5 percent. This proportion is down from one-half in June.
Almost two-thirds of our respondents expect output to expand, but at
a rate below 2.5 percent. The proportion of respondents expecting
improvement in employment, consumer spending, investment, and
housing starts also declined, with the proportion expecting a
decline in the unemployment rate over the next four quarters
dropping from two-thirds to one-third. Most respondents expect
little change in the rate of inflation.
Wages and Prices
Contacts continue to report little upward pressure on wages in
District markets. Salaries in some sectors of California higher
education are expected to decline by 5 percent, and only nominal
increases are reported for state and city workers in Arizona. In
Hawaii, proposed wage increases for hotel workers may be delayed one
year. In California, wage negotiations in the construction sector
are reported to have been settled with no increase in labor costs. A
wage settlement in the forest products industry, however, calls for
an average 3.5 percent annual wage increase over the next two years.
Price changes are reported to be modest except for health care and insurance. Several respondents report retail price markdowns in department and shopping center stores. Supermarket prices are reported as last year's levels, wish slight increases in non-food items balancing declines in food products. Drought conditions, however, are raising utility prices in certain sectors of the Pacific Northwest. Due to the state's budget crisis, higher education fees for California's state universities are expected to climb 40 percent.
Retail Trade and Services
Contacts with major retailing operations report gradual improvement
in department and discount store sales across much of the District.
Sales were reported as "very soft" in June by one major retailer,
but picking up in July. Sluggish conditions continue in southern
California. Contacts report that auto sales are up slightly in
California, but down in Arizona after a strong first quarter. Auto
dealers in Utah report good sales. Some deterioration in consumer
confidence is noted by many contacts, particularly in California
where the state budget crisis and defense reductions threaten
further employment losses.
In Utah, strong expansion is reported in computer services, medical/health services, and engineering and management services. Layoffs in the insurance industry, however, are reported in California. Fiscal problems in California (and so a lesser degree property tax limitations in Oregon) are having a significant adverse impact on most levels of government.
Manufacturing
Cutbacks in aerospace and defense-related industries continue across
the District, with major employment reductions recently announced in
southern California due so production slowdowns and consolidations.
Layoffs are reported in aerospace in Utah, and defense cutbacks have
been felt even in the otherwise robust Idaho manufacturing sector.
The recent weakening of airlines' financial positions due to fare
wars has raised concern about further cancellations of commercial
aircraft orders. Electronic components manufacturing remains weak in
most District markets.
Outside of defense and aerospace, conditions are improving modestly. In the Pacific Northwest, improvement is reported for fabricated metals, industrial machinery, and the region's shipyards. In Utah, production is expanding in office furniture, food products, and automotive airbags. Contacts report stable to declining employment in the utility industries. Railroad employment remains strong, however, due to increasing rail traffic.
Agriculture and Resource-Related Industries
Despite some recent rains, the sixth year of drought is affecting
agriculture adversely in many puts of the Pacific Northwest.
Contacts report a shift to drought tolerant (but less valuable)
crops like grains. Even so, winter wheat yields are reported at only
85 percent of average. Water quality problems are reported, and
reduced flows threaten trout streams and fish hatcheries. In Idaho,
the drought could move up the timing of the potato harvest,
affecting quality. Uncertain log supply and weak housing activity in
California continues to hurt the lumber and wood industries in
Washington and Oregon. A moderate decline in lumber prices is
reported for the last two months, following good conditions earlier
in the year.
Construction and Real Estate
Construction and real estate activity varies substantially across
District markets. The strongest conditions are in Utah, Idaho, and
eastern Washington. Property sales in Salt Lake City are reported up
25 percent from a year earlier, and the combined value of Idaho
construction is up 57 percent from a year earlier. Home construction
and remodeling work is reported to be expanding in Oregon, where dry
weather has advanced the start of the summer construction season.
Home sales in Oregon for May were reported up 14 percent from their
year-earlier level. Residential construction in Arizona continues to
improve, though little commercial and industrial activity is
reported. The housing market in California, however, is reported
sluggish. New home construction remains weak, with permits for the
first five months of 1992 down 12 percent from a year earlier. Sales
of new and existing homes have rebounded somewhat from the weak
conditions of late 1991, but remain below their year-earlier levels.
Commercial real estate conditions remain depressed in southern
California, with transaction prices of some properties falling
substantially below replacement costs.
Financial Institutions
In general, contacts in financial industries report flat to slightly
improving conditions. Downsizing continues in California due to
mergers, cost containment, slow loan demand, and increased problems
in loan portfolios. Several southern California bankers expect
future staff cuts. Large California banks are reporting declines in
commercial, consumer, and real estate lending. The bulk of real
estate lending is for refinancing rather than for new loans. Soft
loan demand has allowed California banks so make sizable additions
to their securities holdings. The banking industries in Utah and
Idaho continue to enjoy favorable business conditions. Mortgage and
consumer loan demand is very strong, while commercial loan demand is
stable. Many banks across the District report sizable shifts from
banks into liquid money fund accounts or into higher yield bond
funds in response to lower interest rates.