March 13, 1996
Summary
Reports from contacts in the 12th District in early 1996 suggest
generally solid economic activity, albeit with some sources of slack
reported. Despite respondents' concerns regarding moderation in the
national economy, most expect stability or improvement in their
respective regional economies. In the recent period, District
manufacturing activity has been particularly strong in the
industrial machinery and high-tech sectors, although international
competition had a moderating influence on the former. Activity in
high-tech services, such as computer software, also exhibits ongoing
strength. However, retail sales markets are weak. Despite reported
capacity constraints and wage increases in some sectors, upward
pressure on wages and prices is limited overall.
Business Sentiment
District respondents, while continuing to expect some slowing in the
national economy, are looking for improved conditions in their
respective regional economies. Among respondents, about half expect
that national unemployment will increase and national economic
growth will be below its long-run average, while most of the others
expect average growth and no change in unemployment. In contrast, an
overwhelming majority of respondents expect more rapid growth in
their region than in the U.S. as a whole. Consistent with this, 80-
95 percent of respondents expect improved or constant business
investment, housing starts, consumer spending, and trade balances in
their respective regions.
Retail Trade and Services
Weakness in retail sales apparently continued after the holiday
season. Respondents in several areas noted that consumer demand is
insufficient to sustain existing retail establishments. Sales of
soft consumer goods--particularly apparel--continue to be low.
In contrast, service industries--particularly those that are technology-intensive--are expanding rapidly. District sales of computer software and financial consulting services to Europe and Japan reportedly are increasing. A major California supplier of telecommunications services reports increased demand and sales in late 1995, particularly to businesses. Also in California, recent state mandates have lowered electricity prices by 6 percent for all customer classes.
Manufacturing
Manufacturing activity is moderate to strong in the District.
Industrial and construction machinery sales remain high in Utah and
Nevada, with many firms facing capacity constraints; a sharp jump in
order backlogs was reported. Despite this strong domestic demand,
prices are being held down by foreign competition, and export
markets for machinery reportedly are weak. However, continued
expansion of semiconductor manufacturing plants is underway in
Oregon, with similar expansion of high-tech manufacturing underway
or planned in Washington state. In general, District exports of
high- tech components to the Pacific Basin countries (and to a
lesser extent Europe) are rising. Also, strong commercial airline
demand--particularly for exports--is boosting production by District
airline manufacturers and their suppliers.
In contrast, a District metal products company reports reduced export demand and lower levels of investment spending in its industry. Some District manufacturers--in sporting goods, for example--reportedly are moving production offshore. Also, demand and prices for most Pacific Northwest forest products continue to hover at low levels.
Agriculture and Resource-Related Industries
Agricultural activity in the District is mixed. Apple exports from
Washington have been weak, but strong grain demand (particularly for
wheat) has pushed prices to new highs throughout the District.
District beef production reportedly is being propped up largely by
high levels of exports to Canada and Asia. In contrast, with the
exception of cotton growers, Central California farmers report
strong sales and low inventories. However, the Alaskan salmon
industry is suffering due to a worldwide glut, and recent heavy
flooding in the Pacific Northwest caused uncertain but perhaps
substantial inventory losses on some crops.
Real Estate and Construction
Reports suggest stable to moderately improving conditions in the
District real estate and construction sectors. In Southern
California, commercial vacancy rates are declining slowly from high
levels, but rental rates have not increased sufficiently to spark
substantial new commercial construction. In the San Francisco Bay
Area, current commercial vacancy rates are low and recent sale
prices for existing homes have exhibited modest increases. In
Arizona, home building reportedly has peaked, but apartment
construction continues unabated. Rebuilding following the recent
severe flooding in Washington and Oregon is expected to increase
construction activity in affected regions in the near future. This
will place additional pressure on the very tight Oregon construction
industry; wages reportedly increased 13 percent in this sector
during the year ending in January, primarily due to extensive
nonresidential construction activity.
Financial Institutions
District bank respondents generally report strong earnings and good
credit quality, despite stiff competition for loans and deposits.
Slight easing of business loan demand is reported in California, but
the level is still high, and consumer credit demand is increasing in
the state. Furthermore, California thrifts reportedly are benefiting
from improved residential housing markets.