January 18, 1995
Summary
Economic growth in the District as a whole appears to be
accelerating slightly, bringing higher rates of resource
utilization. Strengthening of activity in Arizona, California, and
the Pacific Northwest appears to have been only partly offset by a
slight moderation in the fast-growing states of Idaho, Nevada, and
Utah. Retail sales during the holiday season were reported to be
moderately strong in most of the District. The services sector
continues to expand noticeably. Except for aerospace, manufacturing
activity generally remains at high levels in most of the District
outside California, with a few industries reporting capacity
constraints and large price increases. In response to higher
interest rates, home sales and construction appear to have dropped
back a bit, but business investment continues to pick up. Outside of
housing, bank lending activity is reported to be brisk.
Business Sentiment
Twelfth District business leaders generally remain optimistic about
the outlook for real activity in the nation and region. Survey
respondents expect that over the next four quarters national growth
will exceed the long-run historical average pace, the unemployment
rate will fall further, and inflation will accelerate slightly
Within the region, growth in most states is expected to exceed the
national pace. Among regional spending components, business
investment is expected to strengthen further, but housing starts
generally are expected to drop back; the main exception is
California, where some respondents anticipate a slight improvement
in housing construction from relatively weak levels.
Retail Trade and Services
Holiday season retail sales were reported to be moderately strong in
most parts of the District and in some areas to be substantially
stronger this season relative to weak levels a year earlier. Big-
ticket items reportedly sold better than less expensive merchandise;
for example, sales of computer peripheral equipment, software, other
electronic goods, and automobiles generally were reported to be
robust, but lower-end apparel sales were weak, leading to
substantial price discounting in many areas. Within California, the
relative strength in holiday sales was particularly noticeable in
Central and Southern California, where activity last holiday season
was at low levels. Retail sales in Idaho and Utah reportedly were
boosted by the addition of recent domestic in-migrants to the pool
of shoppers in the states, with furniture, housewares, and other
items used in new homes said to be particularly strong. Respondents
from the border region of Arizona noted that the late-December
devaluation of the Mexican peso noticeably inhibited trans-border
shopping by Mexican residents, but this devaluation reportedly had
less immediate effect on holiday sales in the San Diego area.
The services sector continues to expand moderately, boosted by gains in tourism and business services and less of a drag from restructuring in the health care industry. Hospitals were reported to be more willing to make investment purchases recently. Hotel occupancy rates were reported to be high in most of California and Utah, owing in part to convention activity and a strong start to the ski season. Among business services, software development has been strong, and in tight labor markets--such as in Idaho-wages for computer programmers were reported to be increasing rapidly.
The government sector remains weak, and new concerns about budgetary pressures have been expressed in some areas. In Oregon, wages of state government employees are scheduled to be cut in mid-1995. In eastern Washington, expectations of a significant reduction in the workforce at the Hanford site this year are dampening the business outlook in that area. In Southern California, respondents expect the Orange County bankruptcy and investment pool losses to result in a combination of local government layoffs, service cuts, infrastructure project delays and cancellations, and higher "user fees."
Manufacturing
Outside of aerospace, manufacturing activity generally remains at
high levels in most of the District outside California, with a few
industries reporting capacity constraints and large price increases.
In the Pacific Northwest, electronics manufacturing industries were
reported to be producing at high levels, but growth appears to have
slowed somewhat recently. In the pulp and paper industry group, all
segments were reported to be tight now, with strong demand and low
inventories. Newsprint prices reportedly jumped 20 percent in 1994
and are expected to climb about 25 percent further this year. A
major food retailer noted that paper and other packaging costs were
increasing and indicated that the increases will have to be passed
on to consumers.
Agriculture and Resource-Related Industries
District farmers report generally good conditions but express
concern about rising costs of labor, transportation, and raw
materials. Crop and cattle grazing conditions generally have been
aided by high levels of precipitation; water levels in most parts of
California are well above normal so far this winter, and an Arizona
rancher reports enough rain to let cattle feed over a wider than
usual range. In California, some pressure on wages was reported,
particularly for drivers of trucks containing agricultural products,
and transportation costs also have been boosted by an increase in
diesel fuel prices. Several agricultural sector respondents noted
that chemical, water, and packaging costs are increasing rapidly.
Real Estate and Construction
Home sales and construction appear to have dropped back a bit in
many parts of the District recently. In Central and Southern
California, new home construction reportedly weakened, and sales of
existing homes were off. In many other areas, housing sale and
construction activity typically are at seasonal lows this time of
year; changes in activity were less discernible in the thin markets.
Financial Institutions
Bank lending activity is reported brisk, but margins appear to be
shrinking in some areas, as pricing has become more competitive. In
California, some banks expressed concern about the effects of past
lending to businesses that sold products and services to Orange
County and uncertainty about the effects of the Mexican peso
devaluation. However, this was not expected to slow the improving
economic conditions in the state or banking industry substantially,
and community banks in Northern California were particularly upbeat.
In Utah, banks were reported to be experiencing strong deposit
growth and strong demand for consumer and commercial loans.