January 22, 1992
Summary
Economic weakness persists in much of the Twelfth District, although
intermountain regions remain relatively healthy. Christmas sales
were generally below expectations, although some pickup in post-
holiday sales was reported. Manufacturing continues to contract in
California, and little growth is reported in other parts of the
District. Real estate markets arc generally sluggish, but
residential sales activity shows same signs of bottoming out. Wage
and price increases are modest, with the exception of health care.
Significant mortgage refinancing activity is reported by lending
institutions, though other loan demand remains weak. Consumers are
reported to be using the savings from refinancing to reduce other
debt levels, or shifting to shorter-term mortgages to build equity
more quickly. Agricultural and resource industry conditions are
mixed, with livestock and timber sectors reporting stress.
Business Sentiment
Economic expectations of Twelfth District business leaders remain
subdued. Thirty-one percent of respondents now expect output to
decline in at least two of the next four quarters, compared to 25
percent in November and 7 percent in September. An additional 56
percent expect the economy to expand, but at a rate below 2.5
percent. At the same time, the proportion of business leaders
expecting improved business investment, consumer spending, and
housing starts increased from November. The most optimistic
expectations of business leaders were for housing starts, where 58
percent of the respondents projected some improvement in the next
four quarters. Eighty-seven percent expect inflation to decline or
remain stable.
Wages and Prices
Upward pressures on wages and prices remain minimal throughout most
of the Twelfth District. Retailers are reported to have engaged in
heavy discounting in response to sluggish holiday sales. Wage and
price cuts also are reported in service sectors, including
consulting, money management, entertainment, catering, and teaching.
A significant exception is health care, where health benefit plan
prices are expected to rise 8 to 20 percent in 1992. Lumber prices
have been flat since mid-July, and most commodity prices are flat or
falling. Most wage increases in the Twelfth District are reported in
the 3 to 4 percent range, although manufacturing wages in Washington
are reported to be rising 4 to 6 percent.
Retail Trade and Services
Christmas retail sales in the Twelfth District were generally at or
below their weak 1990 levels, even with aggressive discounting used
to attract wary consumers. Sales in California were down somewhat
from last year. Low-end retailers appear to have had a slightly
better experience. Sales in Utah and eastern Washington were strong.
One retailer reports that in the eight days since Christmas, sales
in California have been encouraging, about 5 percent above
expectations.
Auto sales are reported flat in California and down in the Puget Sound area, but show improvement in Idaho. Firms doing business with state and local governments are cautious due to budget problems, and are hiring consultants on contract rather than increasing the number of full-time employees. The demand for legal services is flat. The health services sector, however, continues to add jobs.
Manufacturing
Manufacturing activity in the Twelfth District remains sluggish,
with the number of jobs in California continuing to contract due to
cutbacks in aerospace and electronics. Boeing, however. is still
producing at lull capacity and new orders for commercial aircraft,
which had fallen in 1991, picked up in mid-December. The capital
spending plans of several respondents remain little changed,
apparently unaffected by recent interest rate cuts, though a major
upgrade of an aluminum smelter was recently announced in eastern
Washington.
Agriculture and Resource-Related Industries
Agricultural conditions in the Twelfth District are varied. Cotton,
cattle, and fruit prices are down. Excess supply and falling
consumer and export demand for beef has caused significant losses
among feedlot operators. Losses are also reported by Idaho bean and
potato growers due to low prices. Oregon agriculture, however, has
had its best year in 10 years. Court injunctions have nearly halted
federal timber sales in Washington and Oregon. Lumber product
markets face moderate demand and price increases are expected.
Construction and Real Estate
Construction and real estate activity remains slow in much of the
Twelfth District, with no significant effect yet seen from recent
interest rate declines. In California, the housing industry is
stagnant with prices of some upper-end homes dropping a reported 10
to 15 percent from their previous peak. The number of sales of
existing homes, however, edged up in December after declining since
May. Conditions are reported weak in Washington, with some slippage
in home prices. Contacts in Arizona, however, report a slight
increase in housing starts. Farm and ranch real estate sales in
Idaho are off 50 percent from a year earlier due to weak
agricultural conditions.
Financial Institutions
Twelfth District financial institutions report a significant
increase in mortgage refinancings due to recent interest rate
declines. The resulting savings, however, appear to be used for debt
reduction rather than consumer spending. One-third to one-half of
refinancing applicants are reported moving to a 15-year mortgage to
build up equity with little change in payments. Outside of
refinancings, loan demand remains sluggish, and margins are being
compressed by lower interest rates. Weak earnings continue due to
problem real estate loans.