September 10, 1986
Summary
The Twelfth District economy continues to present a mixed picture.
Consumer spending and residential real estate activity continue to
buoy most local economies, while the manufacturing, oil,
agriculture, and commercial real estate sectors remain weak. The
reduced foreign exchange value of the dollar has yet to produce
widespread improvements in trade dependent sectors, although
producers of some forest and seafood products have noted positive
developments. Weakness in commercial real estate and tax shelter
activity is attributed partly to pending changes in the tax code.
These economic conditions are reflected in weak commercial and
industrial loan demand, but strong demand for residential real
estate loans.
Consumer Spending
Overall, moderate growth in consumer spending continues to provide
an economic boost to most parts of the Twelfth District. Moreover, a
paper products manufacturer reports that box shipments, which depend
primarily on retail sales, were up nearly 8 percent in June over
their year-earlier level. Despite the overall strength, the volume
of retail sales in some economically troubled areas continues to
languish.
The overall growth in consumer spending is not reflected in car sales. Compared with last year's pace, car sales are down 60 percent in Kern County (California), where problems in the agriculture and oil industries have combined to weaken the area's economy, and 10 to 15 percent in San Diego. In Utah, domestic car sales are reported to be sluggish, although foreign cars continue to sell well.
Manufacturing
In most parts of the Twelfth District, manufacturing activity
continues to stagnate. The reduced foreign exchange value of the
dollar has yet to affect most manufacturers. Indeed, one respondent
reports that in the Pacific Northwest the dollar volume of imports
has risen 22 percent during the past year, while the dollar volume
of exports has risen only 13 percent. One sign of a possible
improvement in the U.S. trade balance is that Japanese car company
reportedly has the highest inventory-to-sales ratio in the car
industry. If this is any indication of future activity, auto imports
can be expected to decline during the next few months.
Respondents throughout the District report that some firms are delaying investment plans pending passage and study of the new tax law. Exceptions include companies with strong cash positions and those with longstanding investment plans.
Agriculture and Resource Industries
Prices of most agricultural products remain weak, and the reduced
value of the dollar has done little to stimulate exports of these
products as yet. Almond growers expect to harvest only about half as
much product as they did last year due to poor weather during
pollination, and almond prices have strengthened as a result.
Fisheries in Oregon and Alaska are reportedly selling a large volume of product at high prices. Moreover, the reduced value of the dollar appears to have improved some firms' positions. For example, although exports of seafood products from Alaska remain stagnant, domestic producers are benefiting from reduced seafood imports. In Seattle, one food exporter reports increased volume to Pacific rim countries, and renewed Japanese interest in taking on more products.
Timber producers in Alaska report that their exports to Japan and Korea have risen. Moreover, total lumber exports (measured in board- feet) for the first half of the year were 22 percent above the same period a year earlier, despite falling 9 percent in June. Linerboard exports have risen and newsprint imports are down, but paper imports from Europe are holding steady because suppliers have cut prices to maintain their U.S. market share.
Oil related industries continue to suffer from low oil prices. For example, one major oil company's budget for Kern County has been slashed from $100 million to $13 million, just sufficient to maintain the company's fields. Moreover, the county's drilling rig count has reached a record low, with only 27.5 percent of rigs operating, although some local respondents report that rig activity appears to have bottomed out.
Construction and Real Estate
Homebuilding activity continues to be strong in most parts of the
District. However, in some states, including Alaska and Idaho, weak
economies have slowed residential construction activity.
Respondents throughout the District report that some apartment and commercial real estate developers have cancelled projects or put them on hold due to questions regarding tax reform. Moreover, some banks are reluctant to lend for real estate projects because they are concerned about their future profitability. In the Puget Sound Area, where vacancy rates reportedly are lower than they are in most large cities. tax reform appears to be having a less detrimental effect on office construction than it is in most other areas.
Financial Sector
Business lending volumes are low in many parts of the District.
Weakness in agriculture and manufacturing sectors is aggravated by
widespread caution that is attributed partly to uncertainty about
tax reform legislation. Loan demand for tax shelter and commercial
real estate projects has fallen off particularly sharply.
Mortgage lending continues to provide a source of strength in many areas. For example, mortgage lending volume at one Utah bank was about 30 percent higher during the first half of 1986 than it was during the first half of 1985. Continued strength in mortgage lending is also reported in Oregon and California.