December 9, 1992
Summary
Economic conditions are mixed in the Twelfth District, as weakness
in California is offsetting moderate growth in most other District
states. In California, cutbacks continue in aerospace and defense-
related manufacturing, retail sales are sluggish, and the state's
fiscal condition has worsened. Outside of California, moderate
improvement is reported in retail trade and residential
construction, with the strongest conditions reported in Utah and
Idaho. However, Washington faces further cutbacks in aerospace, and
tourist activity is down in Hawaii. Overall business sentiment
improved slightly and District agricultural conditions are generally
good. Little upward pressure on prices is reported, and several
contacts expect wage increases of around 3 percent.
Business Sentiment
Sentiment among Twelfth District business leaders has improved
moderately since our last report. 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 up from one-fifth
in October and September and has returned to the level seen this
past summer. An additional sixty percent of our respondents expect
real output to expand, but at a rate below 2.5 percent.
Wages and Prices
Several contacts are projecting wage increases of around 3 percent
for the coming year, down from an average of 3.5 to 4 percent for
the past twelve months. The same contacts are reporting that
benefits increases during the coming year will be at least double
that--over 6 percent The increase is attributed largely to the cost
of medical benefits, projected by some contacts to rise 10 or 11
percent. Several respondents noted that their organizations either
had cut back or were planning cutbacks in medical benefits in order
to hold down costs.
Outside of medical costs, few upward pressures on prices are reported in District markets. One exception is wholesale electricity prices in the Pacific Northwest, which have risen with demand and a decreasing power surplus.
Retail Trade and Services
Weakness in California is holding down District consumer spending.
Contacts report that sales are barely above year-ago levels for
California as a whole, before adjusting for inflation, and are
declining in certain regions, mostly in southern California. Retail
sales are showing a slight pickup in recent weeks, however,
particularly in northern California. Consumer confidence in the
southern part of the state is reported as still poor. Outside of
California, contacts report increasing sales and expectations for a
good Christmas season. With respect to retail employment, one
contact from a major retail chain reports that the trend is
definitely toward improving productivity, even if it means laying
off more workers.
A telecommunications firm in California reports that orders for new business hookups are weak, and that uncollectible bills remain high. In Hawaii, tourist-related businesses are still in the process of cutting their staffs due to a decline in visitors from the mainland. Tourism in California is reported to have increased slightly in dollar volume over a year ago, but market share is down. The sluggish California economy has led analysts to project a significant state budget shortfall through the end of the 1993-94 fiscal year. Official estimates of the shortfall range from $4.1 billion to $7.5 billion.
Manufacturing
District aerospace activity continues to contract as layoffs
continue in southern California and Washington. In Washington,
Boeing has completed its slowdown of 737 production, but has
announced plans to reduce production of the 757 and 767 models by
one-third in 1993 with a layoff of 2,500 workers (2,000 in the
Seattle area). Observers in Seattle are forecasting that the local
aerospace industry will drop a total of 10,000 jobs by the end of
1994, with an additional 26,000 "spinoff" jobs lost as a result.
Other District manufacturing activity is mixed. Contacts in Utah still report some reduction in defense-related industries, but new hiring by computer software companies. A contact from northern California reports that conditions for small personal computer and defense-related electronic companies continue to soften. Computer software sales by Washington companies are reported strong. Construction machinery sales are reported up 5 percent over a year earlier. A contact in the paint and coatings industry reports that national sales continue at a level slightly more than 5 percent above a year earlier.
Agriculture and Resource-Related Industries
District agricultural conditions are generally good in most markets.
Contacts in Idaho and Utah report agricultural conditions as
favorable, and contacts in eastern Washington report a strong crop
year. Concern remains, however, about continued drought.
Demand for wood products is holding steady, and western lumber production is running slightly above the level of a year earlier. The operating environment for western lumber producers, however, is described as "tough" due to restricted public timber supplies. Contacts report several recent mill closures due to the shortage of logs, with one contact expecting attrition of one-third of existing Northwest lumber and plywood mills. Demand for western newsprint continues to be very strong, however, and several companies are running at capacity.
Construction and Real Estate
Nonresidential real estate and construction markets are reported to
be weak in several District markets. In southern California, one
contact reports that tenants renewing leases are negotiating rent
discounts of 25 to 40 percent. The same contact expects foreclosures
for major projects in 1993 to exceed those in 1992. Another contact
in northern California reports that rents and the purchase price of
space will probably decline another 10 to 15 percent. Commercial
real estate is reported flat in Utah, and a contact in the Oregon
construction industry reports fierce competition among contractors
due to excess capacity.
Stronger conditions are reported in the residential sector. In California, existing home sales climbed sharply during October, and posted the first concurrent monthly and annual sales increases since February. Contacts in eastern Washington report a continued boom in residential real estate and construction, and housing starts in Utah are reported strong.
Financial Institutions
Conditions at District financial institutions are reported as
sluggish. In California, contacts report that loan demand remains
weak for most types of commercial and consumer credit. The number of
applications for small business loans continues to decline, while
the volume of larger commercial loans also is falling. The
residential mortgage market in California is reported to be mixed.
Moderate demand for first mortgages is largely offset by weak demand
for second mortgages and home equity lines of credit. Outside of
California, contacts report some growth in loans in Arizona and
Nevada and light to moderate business loan demand in Utah. Weak loan
demand, however, is reported in Alaska and Hawaii.