March 15, 1988
Summary
Respondents in most areas of the District continue to report
moderate growth, although concerns about slowing near-term growth
are rising. Conditions in resource-related industries are improved
generally: agricultural conditions continue to improve for most crop
and livestock producers; lumber prices remain high with low
inventories; and energy-related industries—although not expanding—report activity above year-earlier levels. Residential and
nonresidential construction has been weakening in many parts of the
District. Manufacturing activity is mixed, with gains reported in
resource-processing and export-related industries, but slowdowns
reported in construction and defense-related manufacturing. Lending
activity remains mixed, as lower interest rates have prevented the
erosion of business, but have not stimulated increases.
Business Sentiment
Nearly all respondents anticipate slowing national growth this year,
but none expects a recession. Respondents generally expect below
average housing starts, slight increases in the growth of business
investment, slight decreases in consumer spending growth, and
significant shrinkage in the trade deficit. On average, respondents
expect slight increases in both inflation and unemployment rates
this year.
Agriculture and Resource Related Industries
Survey responses indicate strengthening in the agriculture sector.
Higher prices, caused by increased exports and government-induced
production cuts, together with lower interest rates, have helped
increase land prices in most areas of the District. Crop farmers
have reduced their debt burdens significantly as their incomes have
risen. Grain processors report record revenues, although they expect
reduced storage income this year because of reduced inventories. The
domestic wine industry reports strong gains from reduced import
competition. A cattle rancher reports the best conditions since 1975
and expects conditions to strengthen further over the next 2 to 3
years. Farmers and ranchers in California, however, express concern
about possible income losses arising from the imposition of
Proposition 65, the state's initiative to limit the use of toxic
substances.
The forest products industry reports strong prices and low inventories of logs. Respondents expect a decline in demand, however, based on reduced housing starts nationally. Pulp and paper production remains at almost 100 percent of capacity, causing sharp increases in newspaper and publishing costs.
In the mining sector, conditions are improved from year-earlier. The drilling rig count is above year-earlier, although normal seasonal declines are occurring and few in the industry expect further gains this year. Recent declines in oil prices have not yet had a significant effect on exploration and development plans, which included increased investment in Alaska. Metal mining activity continues to rebound in Arizona and Utah as a result of higher prices for copper and gold, reduced wage rates, and improved extraction technology.
Retail Sales
Retail sales in February were up only 2.2 percent from year-earlier,
but retailers are waiting for the Easter season to get a good
reading on consumer spending plans. Retailers report rising prices
for some imported goods, although not all of the dollar's decline
has been passed along. Inventories are reported to be at or slightly
below desired levels for most retailers. Used auto prices are
rising, but dealers report that consumers are waiting for new
incentive programs before buying new autos. Auto inventories are up,
but dealers expect reduced output by major auto makers to begin to
reduce those inventories.
Manufacturing
The outlook for manufacturing is mixed. The falling dollar has
improved the competitiveness of domestic producers, but defense and
construction-related manufacturers face slowing or negative growth.
Current orders should sustain aerospace employment for the next
several years, but the completion of several large defense contracts
may begin to reduce employment this year in many defense-related
industries. Construction-related industries expect reduced sales
following the drop in housing starts. Respondents report declines in
heavy equipment sales for housing and commercial construction, but
report some gains in sales for nonbuilding construction. Increased
prices of steel and other imported raw materials are appearing in
equipment costs. Computer-related firms report rising sales, with
the semiconductor book-to-bill ratio indicating a growing backlog of
orders. Electronic component sales to industrial consumers also are
reported to be strong with inventories declining.
Construction
Construction has weakened overall, although urban areas of Oregon
and Washington report strong housing permits. Construction was
particularly weak in Alaska (a 7 year low), Utah (down 46 percent
in 1987), and Idaho. Residential and commercial construction also
has slowed in California, but activity remains relatively high. Some
growth is reported in nonbuilding construction in many areas of the
West.
Finance
Lower interest rates have improved the outlook of respondents in the
finance sector, although loan demand has not increased
significantly. The decline in rates is generally credited with
preventing a drop in loan demand by increasing consumer optimism,
but does not appear to have caused an increase in demand by making
loans sufficiently more affordable. Several respondents expect a
refinancing boom if fixed-rate mortgages drop an additional 50 to 75
basis points. Several respondents also cite problems obtaining high-
quality loan applications.