September 23, 1992
Summary
Economic weakness persists in California, and conditions are mixed
in other District states. In California, cutbacks continue to be
announced in aerospace and defense-related manufacturing.
Furthermore, cutbacks in state and local government spending are
expected to reduce employment growth in that sector. Outside of
California, moderate improvement is reported in retail trade, non-
defense manufacturing, and residential construction, with the
strongest conditions reported in Utah and Idaho. Drought is
threatening agriculture in certain sections of the Pacific
Northwest. Overall business sentiment continues to decline. Little
upward pressure on wages and prices is reported.
Business Sentiment
Pessimism is increasing among Twelfth District business leaders.
Less than 20 percent 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-third in July and one-half
in June. Three-quarters of our respondents expect real output to
expand, but at a rate below 2.5 percent.
Wages and Prices
Contacts continue to report little upward pressure on prices in
District markets. Grocery prices are reported flat, with meat prices
reported down 3 percent from a year earlier and produce prices
reported down 9 percent. General merchandise and pharmacy price
increases are running at 3.5 percent versus the 6 to 9 percent
annual increases seen in 1991 and 1990. Aluminum prices are dropping
due to weak demand and large inventories. Lumber prices, which
decreased in July, however, have rebounded to high levels as result
of Hurricane Andrew. Also, electricity prices are up in Oregon due
to drought-related reductions in hydroelectric power. A 20 percent
increase in wholesale electricity rates has been proposed in that
state, which would increase average retail bills by 5 to l0 percent.
Wage increases appear modest in most District industries. Increases in the retail sector are reported in the 3 percent range, while contacts in banking expect small increases in wages during the next 12 months. Little upward pressure on manufacturing wages is reported due to cutbacks in production and employment.
Retail Trade and Services
District retailers report sluggish conditions for soft goods in most
markets. Most retailers are reported to be working to reduce
inventories. Major grocery chains are reporting flat sales and
declining earnings. Contacts in Oregon report that retail business
has been slow, but still profitable, and retail sales in Arizona are
reported to have improved. Retail activity in southern California,
however, is reported to have deteriorated. Contacts report that
tourist-related retail and service sector jobs are down in Los
Angeles due to the riots.
Some increases in auto sales in Oregon were reported for August, and contacts in Utah report good summertime new auto sales. A moderate rebound in auto sales is reported in Arizona. However, farm equipment sales are off 50 to 60 percent in Idaho due to the drought.
The recent state budget settlement in California has reduced uncertainty about financing among local governments, but significant cuts in state assistance are expected to result in layoffs. Local governments in Washington have announced a hiring freeze, and state government employment is off in Oregon. Law firms are growing very slowly, and net job losses are expected in accounting. Health care employment continues to increase. Tourism in Hawaii for July was reported down due to discounted air fares within the 48 contiguous states that caused a large drop in California visitors. The effects of the recent Hawaiian hurricane are not yet known, but major damage was confined to the lesser populated island of Kauai.
Manufacturing
Job losses continued to be reported in defense, aerospace, and high-
tech manufacturing. Major additional layoffs in these sectors were
recently announced in southern California. Layoffs by defense
manufacturers and airlines also are reported in Utah. Aviation
production rates are dropping, with a small avionics manufacturer in
Washington expecting a 10 to 15 percent reduction in its production
over the next 12 months. In Washington, contacts report that
Boeing's backlog of orders appears to be softening due to weak
worldwide economic conditions. The company continues to win a large
share of world-wide orders, however.
Outside of these sectors, some modest improvement is noted. In Washington, contacts report improvement in food processing and non- military electronic equipment. In Oregon, heavy truck production is expanding to meet demand from Latin America. Production of computer printers is expected to expand in Washington and Oregon.
Agriculture and Resource-Related Industries
Drought conditions in Idaho are expected to lower farm income by 20
percent this year. Contacts from eastern Oregon report that drought
and hot weather have resulted in a short supply of livestock
pasture. Wheat yields are anywhere from 15 to 50 percent below a
year earlier and are resulting in reduced grain shipments bound for
Pacific Rim markets. However, the unusually sunny weather has
produced sharp increases in tree fruit crops in Oregon and
Washington. Lumber demand and prices have been boosted by
reconstruction activity in Florida and Louisiana. Wood products
production and employment, however, continue to deteriorate due to
the lack of raw timber sales from public lands.
Construction and Real Estate
Construction activity is mixed across District markets. Contacts
report that construction activity is stable in Washington and
Alaska, but is weak in California and Hawaii. Homes and ranch
properties are selling well in Oregon. One contact in Oregon,
however, reports that several major nonresidential projects are on
hold until next year. In the Puget Sound area, single family
construction is 10 percent above a year earlier, but multi-family
construction is 60 percent below a year earlier. Residential
construction activity in eastern Washington and northern Idaho
continues to rise in response to strong demand. Construction
activity in California, however, continues to decline, particularly
in nonresidential sectors. Residential markets in California are
sluggish, with price decreases reported far higher priced
properties.
Financial Institutions
Low interest rates are improving the profitability of District
financial institutions, but demand remains soft for commercial,
industrial, and consumer loans in most markets. The weakest loan
demand is reported in California. Delinquency ratios for commercial
real estate in California continue to rise. Deposit growth is
reported relatively strong in Arizona, but loan demand has been
sluggish except for increased interest in mortgage refinancings.
Relatively stronger demand for consumer loans is reported in Oregon,
and demand for both consumer and mortgage loans remains brisk in
Utah and Idaho. Currently low interest rates have increased the
level of mortgage refinancings across the District, but refinancings
are still below the levels seen in early 1992. In California and
Oregon, contacts report that conventional sources of financing have
been almost completely out of the market for construction financing
and long-term financing of commercial real estate.