December 7, 1994
Summary
The expansion of economic activity in the District as a whole is
continuing at a moderate pace. A slight pickup in growth in
California, which accounts for about 60 percent of the District
economy, is being offset by some slowing in fast-growing District
states, like Idaho and Utah. Real estate and construction activity
in the District has slowed to a more moderate pace. Within the
retail sector, a slight dropback in motor vehicle sales has not
overshadowed strength elsewhere. Business investment appears to be
strong in most of the District, owing, in part, to manufacturers'
efforts to expand capacity. Loan demand at banks is increasing,
buoyed by strength in the commercial and consumer segments.
Scattered reports of price pressures pertain mainly to intermediate
materials.
Business Sentiment
Twelfth District business leaders generally remain optimistic.
Survey respondents expect national output to grow faster next year
than the long-run average pace of growth, and respondents continue
to expect inflation to accelerate slightly next year. Regional
growth over the next four quarters is expected to exceed the
national average in Arizona, Oregon, and the intermountain states,
match the national average in Washington, and be only slightly
weaker than the nation in Alaska and California. Compared to the
previous survey, the outlook for regional growth has been scaled
back a bit for interest-sensitive sectors, such as business
investment and residential construction; some potential investors
were reported to be adopting a "wait-and-we" posture on whether the
interest rate increases to date will seriously impede demand.
Nevertheless, about one-half of the respondents still expect
business investment to accelerate next year.
Retail Trade and Services
Within the retail sector, a slight dropback in motor vehicle sales
has not overshadowed strength elsewhere. Respondents from California
describe recent retail activity as bustling and report high
expectations for holiday sales; more recently, media reports suggest
a strong Thanksgiving weekend start to holiday sales in California.
A major western grocery chain reports good sales and some pressure
on food prices from the earlier passthrough by manufacturers of
increases in prices of plastics and other packaging raw materials.
In Idaho and Washington, truck sales generally were reported to be
strong, though some softening in the mini-van market was noted. New
vehicle sales as a whole were reported to have been constrained
earlier by delays in deliveries to dealers from manufacturers. More
recently, the lead time from order to delivery is reported to have
shortened, owing, in part, to a slight dropback in dealer sales.
Conditions are mixed among service producers. In California and Washington, employment and investment in the health care industry reportedly are being restrained by consolidation and uncertainty about future industry structure. Also, given an uncertain regulatory environment, a major auto and home insurer is modifying earlier plans to expand in Central California. In contrast, the transportation, communications, computer services, and tourism industries generally are operating at high levels and expanding. Sales of software produced in Washington are strong, and respondents expect software sales to be buoyed further by increasing exports. In Utah, hotel occupancy rates are high, and advance reservations for die ski season are strong; several hotels in Salt Lake City plan to expand their capacity.
Manufacturing
Outside of the depressed aerospace sector, District manufacturing
activity remains at high levels. A Washington electronic components
manufacturer reported a further increase in order volume, and a Utah
machinery manufacturer indicated that general business conditions
remain strong. Sales of western wood products also have been strong,
despite recent moderation of housing construction, as supplies of
southern wood products have been limited by weather-related
production difficulties. Respondents from Oregon indicate that paper
prices are up sharply, and timber costs remain high.
Efforts to expand capacity were reported for many manufacturing industries. A U.S affiliate of a Japanese television manufacturer is reported to be expanding research, development, and distribution facilities in San Diego, as production at its Tijuana manufacturing plant picks up. In Central California, a major food processing plant is doubling capacity. An air bag manufacturer as reported to be expanding operations in Utah, and a multinational consumer electronics manufacturer is building a large plant in Oregon.
Agriculture and Resource-Related Industries
Recent reports from the farm sector suggest improved sales volumes
and prices for some major commodities. Sales volumes for cattle,
grain, and late season crops have been moderate to strong, and most
respondents from the agricultural sector report that product prices
are relatively high. Particularly strong prices are reported for
cotton and wheat, and fresh fruit prices have risen. In contrast,
potato prices are weak.
Real Estate and Construction
Real estate activity has slowed noticeably in some areas. In
California, housing sales volume dropped back in the third quarter
from a strong second-quarter pace; however, respondents from
Southern California described the overall increase in real estate
activity as "meaningful." Outside of California, residential sales
activity appears to have slowed significantly from a rapid pace,
particularly in Idaho and Utah.
Construction activity is mixed. In Idaho and Utah, a slowdown in residential construction in the last three months is reported to have eased capacity constraints; however, prices of construction materials are reported to be still increasing quickly. In eastern Washington, residential housing investment continues at a relatively high level, but a respondent sees preliminary evidence of a softening in demand. In Southern California, new construction of office properties is almost non-existent, but the industrial real estate picture is reported to be brighter.
Financial Institutions
Distract banking conditions are reported to be healthy. In
California, commercial loan demand at large banks has picked up, and
asset quality is reported to be improving slowly. Consumer loan
demand is strong in Utah and Idaho, but real estate lending is down
substantially from a year earlier.