November 4, 1992
Summary
Economic conditions are mixed in the Twelfth District, with
continued weakness in California offsetting modest growth in other
states. In California, weakness is reported in trade, finance, real
estate markets, and construction activity. Moreover, health and
welfare programs are beginning to feel cutbacks in state and local
government spending resulting from the recent state budget
agreement. In the southern part of the state, weakness persists in
aerospace and defense-related manufacturing. Conditions in other
District states are improving modestly, with the strongest
conditions reported in Utah and Idaho. However, most contacts expect
sluggish overall economic growth. Agricultural conditions are mixed,
with drought affecting certain sections of the Pacific Northwest.
Little upward pressure on wages and prices is reported.
Business Sentiment
The sentiment of Twelfth District business leaders was little
changed from our last report, with most contacts expecting sluggish
growth. Only 20 percent of our respondents expect the real economy
to expand during the next four quarters at a rate of at least 2.5
percent. This proportion is about the same as in September but down
from one-third in July and one-half in June. Almost 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 few upward pressures on prices in
District markets. Lumber and roofing materials prices have risen due
to recent hurricanes, but the surge in demand for plywood appears to
have ebbed and prices are reported to have dropped 15 percent in
recent weeks. Retail consumer prices in Utah and Idaho rose at a 4.5
percent annual rate during the first three quarters of 1992. A
contact in the telecommunications industry reports generally
declining prices and price concessions by suppliers.
Boeing Company machinists approved a new three-year contract with the company on October 2. The deal included a 12 percent lump sum bonus check this year followed by 3.5 percent pay increases during the next two years. Labor wages in the rail industry are reported to be increasing by 3 percent for less than a third of employees, with the rest receiving no increase.
Retail Trade and Services
Consumer sentiment appears severely affected in southern California,
where contacts report general pessimism due to continuing employment
cutbacks. One contact reports that while general merchandise
retailers saw business pick up nationally in September, no
significant change from sluggish conditions is apparent in
California. Contacts from several states report that discount and
outlet stores are doing well and expanding operations. In Arizona,
retail sales rebounded during the summer, showing a 4.3 percent
increase in August over a year earlier. One contact reports that
durable goods sales in Arizona are suppressed by low consumer
confidence, but that auto sales in August were up 6 percent from a
year earlier. An auto industry contact from Idaho also reports that
sales have improved somewhat since our last report.
The fall-out of the California state budget settlement reached in September is beginning to be felt. All public state agencies experienced major reductions in funds, with health and social welfare programs particularly hard hit. To offset lower funding levels, public colleges and universities are reducing employment and raising fees.
Manufacturing
District manufacturing conditions are mixed, but defense-related
employment reductions continue in southern California. Contacts in
Utah and Arizona report some increases in aerospace activity due to
shifts from California, and employment cuts in defense appear to be
over in Idaho and Utah. One contact reports that the aerospace
industry has been helped by the avoidance of a strike at Boeing and
continued strong airplane orders from Pacific-Rim airlines. However,
Boeing is cutting back the production rate of its 737 model this
year, and plans to slow production of the 757 in September 1993.
Aluminum production is reported to remain high, although prices have
fallen sharply.
Outside of aerospace and defense, conditions are mixed. One contact from Silicon Valley reports that the price war continues in the personal computer industry, and that a significant shake-out in the industry is expected. High-tech manufacturers are reporting some cancellations of orders from Japan, but in general export demand from Latin America and Pacific Basin countries is supporting manufacturing activity across the District. One contact from Arizona reports that business is booming for suppliers to Mexican firms.
Agriculture and Resource-Related Industries
Eastern Oregon and most of Idaho are still in the grips of drought
as irrigation water has been shut off for quite some time and
reservoirs are at extremely low levels. Tree fruit crops, however,
have been helped by sunny weather. Apple production in Oregon is 54
percent above last year's crop, and cherry production in eastern
Washington is up 30 percent from a year earlier.
Forest products production continues weak. Lumber exports are 25 percent below 1991 levels, due primarily to declines in shipments to Japan and other Pacific Basin countries. While damage from the recent hurricanes caused plywood demand to surge, a contact reports that the short-term jump in demand has subsided.
Construction and Real Estate
Residential construction and real estate conditions are mixed.
Contacts in California report sluggish sales, with prices decreasing
in some areas, particularly for higher priced houses. A contact in
southern California notes that home foreclosures are up 74 percent
since the beginning of 1992, and another contact reports concern
that people cannot sell homes. Weakness in construction activity in
California is reflected in a 5.1 percent decline in lumber shipments
to California during the first half of 1992 versus a year earlier.
Stronger conditions exist in other District states. Contacts in
Oregon report a strong real estate market with a wave of
construction activity in August. House sales in Salem were 31
percent above their year-earlier level in August. Housing sales,
construction and prices are up in Tucson, but Phoenix still is
reporting weakness. Contacts in Utah and Idaho are reporting
continued strong growth in housing demand. Nonresidential
construction remains weak in most District markets.
Financial Institutions
Financial industry conditions are mixed in the District, with
weakness reported in California. One California banker reports that
consumer loan demand continues to drop, and that commercial loan
demand remains weak, although loan officers report some recent
pickup among high-tech industries in northern California. Another
contact reports that loan demand remains weak as consumers and
businesses continue to be focused on debt reduction. Demand for
mortgage loans in Utah remains brisk, with demand coming from
consumers upgrading their housing and from continued migration into
the state. Contacts in Oregon report that, despite recent mergers,
employment in financial services is growing due to relatively strong
economic conditions. Commercial loan demand in Utah and Arizona,
however, is described as flat.