Federal Reserve District, 12th ; Natural resources - West

Ronald H. Schmidt

English

Research Papers in Economics

FRBSF WEEKLY LETTER
May 20,1988
Resource Industry Outlook
Natural resource industries in the West enjoyed
a strong recovery during the past year. Agricul-
ture, forestry, andmining registered gains, boost-
ing the economies of many western states. This
recovery should continue in the near-term;
however, the long-term outlook for the resource
sector is clouded by potential cuts in some agri-
cultural support programs, additional environ-
mental restrictions, and uncertainties concerning
oil and mineral prices.
Strength in 1987
Nearly all natural resource industries enjoyed
improved conditions during the past year. Agri-
cultural producers reported strong growth in
income. Reduced supply pushed livestock prices
up sharply. Likewise, decreased stocks of key
commodities and a surging export market
buoyed crop prices. Record government spend-
ing on support programs reduced grain and
dairy cattle surpluses, increased·farm income
sharply, and supported export growth.
The forest products industry felt the export boom
most directly. Strong demand from Japan led to
record prices for logs, declining log inventories,
and sharply higher profits in the industry. Like-
wise, paper production remained near capacity.
Mining - even oil and gas extraction - also
strengthened over the year. Mineral prices in the
West rose 24 percent. Increases in aluminium
prices pushed aluminum production to capacity,
and rising copper prices prompted the reopening
of copper mines. Energy extraction activity,
while still depressed relativeto the early 1980s,
increased during the year. Greater stability in oil
prices stimulated drilling in the West; activity
increased 30 percent between the first quarter of
1987 and the first quarter of 1988.
Econon;ties strengthened
Improved conditions in these resource industries
strengthened the economies of many western
states. Gains in metal mining boosted employ-
ment in Arizona, Idaho, Nevada, and Utah.
Strengthening oil prices halted the employment
slide in Alaska and boosted employment in Cal-
ifornia. The robust performance ofthe forest
products industry helped to propel the Oregon
and Washington economies to strong employ-
ment growth. With the exception of Idaho,
where low potato prices depressed income,
farmers and ranchers throughout the West
enjoyed strong income growth and reduced their
debt burdens significantly.
Concerns about the future
In the future, however, resource industries face
significant obstacles. Drought conditions in the
short run and potential government spending
cuts in the long run threaten western agricultural
production. Because of critical water shortages
in several western states, beef producers may be
forced to reduce herd sizes, and some irrigation
of crop land may be restricted. In California,
new restrictions on pesticide and fertilizer use
also may reduce yields.
Over the longer term, efforts to reduce govern-
ment spending may include cuts in agricultural
programs. Although agricultural producers in the
West receive a smaller-than-averageshare of
government payments, the elimination of sup-
port prices and acreage reduction programs
would put downward pressure on crop prices
and could diminish profits, particularly in the
District's cotton, dairy, and wheat production.
In the forest products industry, production has
fallen due to restrictions on access to forest land.
Continued drought conditions have increased
the fire danger, and threaten further to restrict
timber cutting. Over the longer term, moreover,
the supply of available timber is in doubt. New
forest service proposals favoring competing uses
of forest land could significantly reduce the
amount ofpublic land available for logging.
THE WESTERn ECOnOmy The Western Economy is a quarterly
review of economic conditions in the Twelfth Federal Reserve District. It is published in the Weekly
Letter on the third Friday of February, May, August and November.
JFRBSF
The mining industry also faces problems.
Energy-related mining is dependent on oil
prices, which remain unpredictable. Other min-
erals currently are enjoying high prices, but the
history of mineral prices suggests that continued
strengthening is unlikely. Mineral prices have
been highly volatile during the past 100 years,
and after correcting for the general rate of infla-
tion, prices for most major minerals are little
changed from those of the late 1800s.
Outlook
In the short run, the western region will continue
to benefit from positive developments in its nat-
ural resource industries. Prices and profits
should remain strong for most resources over the
next year or two. Over the longer term,
however, the serious problems facing Western
resource industries threaten to diminish these
industries' contribution to total employment and
income growth in the West.
Ronald H. Schmidt
Growth Continues in Western Region
The TWelfth Federal Reserve Districtcontinues
to post solid economic growth, at a pace
exceeding that of the nation. Nonagricultural
employment grew at a 4.5 percent seasonally
adjusted annual rate in the West during the first
quarter of 1988, compared with 3.7 percent
nationally.
The reduced foreign exchange value ofthe dol-
lar has increased the competitiveness of many
western products on world markets. Increased
exports have improved profitability and
increased employment in such resource sectors
as forest products, metal mining, and agricul-
ture. Manufacturing activity also has been
buoyed by the reduced value of the dollar, as
well as by improvement in the electronics indus-
try and by strong demand for commercial air-
craft. These factors have resulted in a modest
acceleration of manufacturing employment
growth. During the next several years, strong
demand for commercial aircraft should mitigate
the.adverse effects of reduced defense spending,
and further export gains should continue to typ-
ify other manufacturing sectors.
While economic conditions are solid overall,
construction activity has beenmixed, with sub-
stantial variations among building types and
areas. In general, single-family home con-
struction has been steady, despite consumer jit-
ters after October's stQck market decline and a
rise in mortgage rates abovethe 10 percent
level. Office and apartment construction has
fared poorly in most areas due to a combination
of overbuilding and changes in tax laws that
make these projects less attractive.
Differences among states also are evident.
Nevada posted the strongest employment
growth rate in the nation through most of 1987,
due, in part, to strong tourist and gaming
activity. The state also is enjoying a construction
boom because of its low rents and cost of living,
which enable firms to pay lower wages and
provide a favorable business climate. California,
Hawaii, Oregon, and Washington also exhibited
solid growth, and should continue to do so.
However, Nevada and Oregon may experience
somewhat slower - though still strong-
growth.
In Idaho and Alaska, economic fortunes have
improved in recent months. Alaska's economy
seems to be pulling out of its two-year-old oil-
related recession, but slow growth is likely for
the next couple of years. Improvements in agri-
culture and metal mining appear to have caused
a modest turnaround in Idaho as well. In con-
trast, Utah's economy continues to be sluggish.
Although manufacturing and services provide
some growth,the construction industry currently
is at a standstiII.
Arizona's first quarter employment growth rate
of 3.3 percent isrespectable by most standards,
but it represents a significantdeterioration from
past robust growth. Slower population growth,
reduced construction activity, and lackluster
manufacturing activity portend continued mod-
erationin Arizona's growth rate.
Carolyn Sherwood-CallDISTRICT INDICATORS
(SEASONALLY ADJUSTED)
% CHANGE FROM:
88Q1 87Q4 87Q3 87Q2 87Q1 86Q4 86Q3 86Q2 87Q4 87Q1
AGRICULTURE
U.S. CROP PRICES, 1985=100 101.5 100.5 99.8 100.1 95.0 95.3 96.9 95.0 0.96 6.77
DISTRICT CROP PRICES, 1985=100 104.5 111.1 101.8 101.0 96.6 92.9 93.2 93.9 -6.01 8.18
FARM CASH RECEIPTS, MILLION $ N/A 1975.3 2160.8 2132.4 2029.3 1945.8 1826.0 1901.4 N/A N/A
CATTLE ON FEED, 1985=100 93.3 95.3 94.3 85.4 81.8 81.1 83.7 89.6 -2.15 13.96
CATTLE PRICES, CALIFORNIA, $/CWT. 61.2 57.8 58.0 56.4 52.4 49.4 47.2 42.7 5.76 16.80
FORESTRY
LUMBER PRODUCTION, MILLION BOARD FEET 1729.9 1762.6 1760.8 1770.2 1796.8 1822.0 1659.1 1589.8 -1.85 -3.72
NORTHWEST LUMBER INVENTORY, MIL. BOARD FEET 2514.5 2470.3 2608.2 2643.2 2584.3 2598.7 2525.4 2535.4 1.79 -2.70
U.S. LUMBER PRICES, 1985=100 109.9 109.0 111.9 107.2 104.1 101.5 102.1 103.1 0.84 5.58
ENERGY
SPOT PRICE OF OIL, $/BARREL 16.7 18.7 20.4 19.3 18.2 15.3 13.8 13.9 -11.04 -8.56
U.S. RIG COUNT 973.8 1002.2 1037.5 880.0 810.5 786.9 751.2 907.7 -2.84 20.15
DISTRICT RIG COUNT 79.1 99.5 102.9 82.6 60.1 61.8 62.1 78.5 -20.52 31.49
FUEL MINING EMPLOYKENT, 1985=100 77.1 77.9 78.2 77.6 76.0 77.1 77.4 84.9 -1.00 1.43
U.S. SEISMIC CREW COUNT 199.1 189.8 181.9 173.8 157.5 152.3 151.4 200.4 4.92 26.38
MINING
MINERAL PRICES, 1985=100 159.8 149.3 129.9 119.9 107.5 104.9 102.6 101.1 7.07 48.72
METAL MINING EMPLOYMENT, 1985=100 141.3 131.8 126.8 119.7 111.7 102.6 96.8 96.5 7.20 26.50
CONSTRUCTION
NONRESIDENTIAL AWARDS 1508.9 1602.2 1489.6 1464.9 1450.6 1405.4 1452.0 1329.7 -5.82 4.02
RESIDENTIAL PERMITS 27923 28694 30783 30200 32517 41469 36123 38490 -2.69 -14.13
WESTERN HOUSING STARTS, THOUSANDS 29.1 27.9 37.6 40.1 34.3 35.5 40.6 50.6 4.18 -15.16
CONSTRUCTION EMPLOYMENT, THOUSANDS 945.1 916.9 909.9 905.8 901.3 895.6 872.3 862.6 3.08 4.86
MANUFACTURING
WAGES, CALIFORNIA, $/HOUR 10.8 10.9 10.8 10.7 10.7 10.5 10.4 10.3 -0.64 1.16
EMPLOYKENT, THOUSANDS 3087.2 3056.1 3024.7 3004.1 2991.1 2982.7 2950.3 2953.7 1.02 3.22
DURABLES, 1985=100 102.2 101.1 100.4 99.7 99.3 99.1 98.8 99.0 1.10 2.94
CONSTRUCTION DURABLES, 1985=100 110.8 108.4 107.6 107.4 107.1 105.9 102.9 102.2 2.16 3.46
AEROSPACE, 1985=100 116.0 114.7 113.4 112.2 111.1 109.5 108.9 107.6 1.11 4.40
ELECTRONICS, 1985=100 98.1 97.2 95.9 94.9 94,7 94.6 94.4 93.9 0.93 3.64
WHLS/RETAIL TRADE EMPLOYMENT, THOUSANDS 383.3 399.2 427.4 426.6 405.9 406.3 391.2 385.8 ...3.98 -5.56
RETAIL SALES, PACIFIC DISTRICT, MIL. $ 20511 20133 19722 19531 18947 19015 18895 18346 1.88 8.25
SERVICES EMPLOYKENT, THOUSANDS 4645.5 4587.1 4533.8 4486.5 4424.1 4347.8 4291.4 4252.1 1.27 5.01
HEALTH CARE, 1985=100 112.8 111.4 110.1 108.7 107.7 106.0 105.0 103.8 1.28 4.70
BUSINESS SERVICES, 1985=100 118.7 115.9 115.1 113.5 111.3 109.2 107.3 105.6 2.42 6.63
HOTEL, 1985=100 116.2 114.9 112.2 110.6 108.8 106.4 105.0 103.5 1.10 6.75
RECREATION, 1985=100 109.5 108.2 106.1 106.6 105.4 103.3 103.8 102.5 1.22 3.88
FINANCE, INSUR. AND REAL ESTATE EMPLOYMENT 1216.1 1209.2 1204.5 1196.2 1182.6 1169.2 1157.5 1149.8 0.57 2.83
GOVERNMENT EMPLOYKENT, THOUSANDS
FEDERAL GOVERNMENT 610.3 609.9 605.3 605.2 601.0 599.5 596.5 599.1 0.07 1.56
STATE AND LOCAL 2566.7 2551.1 2527.3 2502.3 2490.0 2479.4 2466.5 2436.2 0.61 3.08
Data are weighted aggregates of avai lable 12th District states, and are expressed as monthly rates unless otherwise noted.
District Indicator data are constructed by FRBSF research staff from public and industry sources.
Opinions expressed in this newsletter do not necessarily reflect the views of the management of the Federal Reserve Bank of
San Francisco, or of the Board of Governors of the Federal Reserve System.
Editorial comments may be addressed to the editor (Barbara Bennett) or to the author.... Free copies of Federal Reserve
publications can be obtained from the Public Information Department, Federal Reserve Bank of San Francisco, P.O. Box 7702,
San Francisco 94120. Phone (415) 974-2246.PERSONAL INCOME GROWTH1
ANNUAL GROWTH
87Q4 87Q3 87Q2 87Q1 86Q4 1987 1986 1985
ALASKA 10.9 0.5 7.0 -11.1 -5.0 1.7 -2.7 6.6
ARIZONA 6.4 6.1 6.6 5.7 7.1 6.3 8.1 11.0
CALIFORNIA 8.5 2.9 7.7 9.3 6.3 7.3 7.0 8.9
HAWAII 8.3 9.1 5.7 5.0 6.3 7.2 7.2 8.1
IDAHO -0.1 11.9 3.5 1.0 5.0 4.1 3.0 4.5
NEVADA 10.8 10.3 6.9 6.6 7.5 8.9 8.2 8.4
OREGON 6.4 7.7 4.9 3.4 4.2 5.7 5.2 5.5
UTAH 7.9 2.8 7.1 2.5 0.7 5.2 2.7 6.0
WASHINGTON 6.8 7.0 4.6 -2.5 12.2 4.0 8.4 6.8
12TH DISTRICT 8.0 4.1 7.0 6.8 6.5 6.7 6.8 8.4
U.S. 9.9 5.7 5.1 7.6 4.5 7.3 5.5 6.8
NON-AGRICULTURAL EMPLOYMENT GROWTH1
ANNUAL GROWTH
88Q1 87Q4 87Q3 87Q2 87Q1 19882 1987 1986
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AVERAGE UNEMPLOYMENT RATES
ANNUAL AVERAGE
88Q1 87Q4 87Q3 87Q2 87Q1 19882 1987 1986
ALASKA 1.7 4.9 -4.6 -1.1 -6.1 1.7 -1.7 -6.4 9.3 10.1 10.6 11.2 11.4 9.3 10.8 10.9
ARIZONA 3.3 4.0 3.0 2.0 3.1 3.3 3.1 4.1 5.7 6.0 6.1 6.3 6.6 5.7 6.3 6.9
CALIFORNIA 5.1 3.3 3.5 3.9 3.6 5.1 3.6 2.5 5.2 5.4 5.5 5.9 6.2 5.2 5.7 6.7
HAWAII 4.6 7.4 1.9 2.6 3.1 4.6 3.8 2.6 3.5 3.8 3.8 4.0 4.2 3.5 4.0 4.9
IDAHO 4.7 3.2 2.9 4.0 -6.1 4.7 1.0 -0.2 7.4 7.3 7.4 8.2 8.9 7.4 8.0 8.8
NEVADA 7.5 7.0 5.9 6.9 6.3 7.5 6.7 5.8 6.0 6.0 6.3 6.5 6.4 6.0 6.3 6:0
OREGON 6.9 3.8 2.8 3.9 3.5 6.9 3.5 2.7 6.0 5.7 5.8 6.1 7.0 6.0 6.2 8.5
UTAH 0.3 2.8 -0.4- 1.2 1.5 0.3 1.3 1.0 5.5 5.9 6.4 6.6 6.6 5.5 6.4 6.0
WASHINGTON 4.7 5.4 4.2 4.1 3.9 4.7 4.5 3.6 7.0 7.4 7.4 7.7 7.8 7.0 7.6 8.2
12TH DISTRICT 4.9 3.8 3.3 3.7 3.3 4.9 3.5 2.6 5.5 5.8 5.9 6.2 6.5 5.5 6.1 7.0
U.S. 3.7 4.0 2.2 2.3 2.9 3.7 2.9 2.0 5.7 5.9 6.0 6.2 6.6 5.7 6.2 7.0
1 Annuali zed growth rates, percent. 2 Year-to-date.
J

Resource industry outlook

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