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tDERAL RESERVE BANK PF SAN FRANCISCO OFFICE OF THE PRESIDENT A PERSPECTIVE ON THE ECONOMIC OUTLOOK ROBERT T. PARRY PRESIDENT FEDERAL RESERVE BANK OF SAN FRANCISCO HAWAII BANKERS ASSOCIATION C O NFER EN C E OF HAWAII BANKERS HONOLULU, HAWAII NOVEMBER 22, 1986 - 1 - Go o d m o r n i n g l a d i e s a n d g e n t l e m e n , It c e r t a i n l y is a PLEASURE TO BE ABLE TO SHARE SOME THOUGHTS WITH YOU ON THE OUTLOOK FOR THE ECONOMY. BUT I ALSO WANT TO MENTION A FEW UNCERTAINTIES THAT ARE CLOUDING THE CRYSTAL BALL. FINALLY/ I'D LIKE TO MENTION VERY BRIEFLY SOME OF THE CHALLENGES TO MONETARY POLICY PRESENTED BY THE ECONOMIC OUTLOOK AND BY THOSE TROUBLING UNCERTAINTIES. As I ' m sure most of you know, economic growth in the United States has slowed recently, raising concern in many QUARTERS THAT THE CURRENT EXPANSION IS COMING TO AN END. A f t e r g r o w i n g a t an a c c e p t a b l e , b u t u n s p e c t a c u l a r , 3 PERCENT RATE DURING 1985, GROWTH IN THE ECONOMY'S OUTPUT HAS SLOWED TO A 2.4 PERCENT ANNUAL RATE SO FAR THIS YEAR. Over the past year and a-half, the U.S. unemployment RATE HAS BEEN STUCK BETWEEN 6 3/4 AND 7 1/4 PERCENT — SOMEWHAT HIGHER THAN THE 6 TO 6 1/2 PERCENT THAT APPEARS TO REPRESENT "FULL" EMPLOYMENT IN THE U.S. ECONOMY. - 2 - MOREOVER/ CAPACITY UTILIZATION IN MANUFACTURING ACTUALLY HAS DECLINED RATHER SUBSTANTIALLY, De s p i t e t h e s e r e l a t i v e l y l a c k l u s t e r n a t i o n a l STATISTICS/ I BELIEVE THAT A PICK-UP IN THE U.S. ECONOMY IS IN THE OFFING. OVER THE NEXT YEAR/ I THINK THAT THE U.S. ECONOMY WILL GROW AT AROUND A 3 PERCENT RATE/ AND THAT SOME PROGRESS WILL BE MADE TOWARDS ACHIEVING A FULLER EMPLOYMENT OF BOTH LABOR AND CAPITAL. The outlook for the U.S. economy is subject to a NUMBER OF MAJOR UNCERTAINTIES/ PERHAPS MORE THAN USUAL. An d j u s t as t h e s e u n c e r t a i n t i e s c r e a t e d i f f i c u l t i e s f o r THOSE OF YOU MAKING BUSINESS PLANS FOR THE COMING YEAR/ THEY ALSO MAKE THE F e d 's JOB OF FORECASTING ECONOMIC DEVELOPMENTS AND OF DESIGNING MONETARY POLICY MORE DIFFICULT. T he F u n d a m e n t a l s T h e r e a r e t w o f u n d a m e n t a l f a c t o r s t h a t l e a d me to my - 3 - FAIRLY OPTIMISTIC OUTLOOK FOR THE ECONOMY NEXT YEAR, F i r s t , t h e i n t e r n a t i o n a l v a l u e of t h e d o l l a r has DROPPED SUBSTANTIALLY WITH RESPECT TO MAJOR CURRENCIES since F e b r u a r y of l a s t y e a r . T h i s d r o p e n a b l e s U.S. EXPORTERS TO COMPETE MORE EFFECTIVELY IN MARKETS ABROAD, WHILE FOREIGN PRODUCERS FIND IT MORE DIFFICULT TO SELL THEIR GOODS AND SERVICES IN OUR MARKETS. I BELIEVE OUR TRADE DEFICIT IS BEGINNING TO IMPROVE AND THAT IT SHOULD CONTRIBUTE SIGNIFICANTLY TO ECONOMIC GROWTH NEXT YEAR. S e c o n d , i n t e r e s t r a t e s in t h e Un i t e d S t a t e s h a v e FALLEN SHARPLY THIS YEAR, CONTINUING A TREND THAT BEGAN IN THE LATTER HALF OF 1984. LOWER INTEREST RATES PROVIDE SUPPORT TO THE INTEREST-SENSITIVE SECTORS OF THE ECONOMY, INCLUDING SPENDING FOR PLANT AND EQUIPMENT, CONSUMER DURABLES, AND RESIDENTIAL STRUCTURES. T h IS DECLINE IN INTEREST RATES HAS BEEN FACILITATED AND ENCOURAGED BY F e d e r a l Re s e r v e m o n e t a r y p o l i c y . F o u r t i m e s t h i s y e a r , th e - 4 - DISCOUNT RATE HAS BEEN CUT/ FOR A TOTAL REDUCTION OF 2 PERCENTAGE POINTS, LOWER INTEREST RATES HAVE BEEN AN IMPORTANT FACTOR IN KEEPING THE ECONOMIC EXPANSION GOING INTO WHAT IS NOW ITS FOURTH YEAR, Mo r t g a g e r a t e s h a v e b e e n a p a r t of t h e g e n e r a l f a l l in RATES/ PRODUCING SIGNIFICANT EXPANSION IN HOMEBUILDING. SUPPORT OF LOWER INTEREST RATES/ CONSTRUCTION OF SINGLE FAMILY HOUSES IN THE U.S. SHOULD CONTINUE AT A HEALTHY RATE THROUGH THE END OF NEXT YEAR. HOWEVER/ PASSAGE OF THE TAX REFORM BILL ALREADY HAS BEGUN TO DISCOURAGE NEW MULTI FAMILY CONSTRUCTION/ AND I WOULD NOT BE SURPRISED TO SEE MULTI-FAMILY STARTS DOWN SUBSTANTIALLY IN 1987 COMPARED WITH THIS YEAR. T he DECLINE IN LONG-TERM INTEREST RATES HAS NOT YET STIMULATED BUSINESS SPENDING FOR CONSTRUCTION AND EQUIPMENT. T h i s PROBABLY IS a RESULT OF LARGE UNUSED CAPACITY/ DISLOCATIONS IN THE OIL AND GAS INDUSTRIES/ AND 5 - HIGH OFFICE VACANCY RATES. - HOWEVER/ I EXPECT MORE ACTIVITY OF THIS TYPE THROUGHOUT THE COUNTRY AS THE ECONOMY BEGINS TO EXPAND MORE RAPIDLY AND SALES PROSPECTS IMPROVE, GENERALLY I'M OPTIMISTIC. SO/ BUT MY OPTIMISM IS TEMPERED BY SEVERAL AREAS OF UNCERTAINTY. Ar e a s o f Un c e r t a i n t y O ne m a j o r u n c e r t a i n t y is h o w m u c h of a n i m p r o v e m e n t in OUR TRADE DEFICIT ACTUALLY WILL RESULT FROM THE DECLINE IN THE DOLLAR. DATA THROUGH THE SECOND QUARTER DIDN'T GIVE ANY SIGNS THAT THE TRADE DEFICIT HAD BEGUN TO IMPROVE/ EVEN THOUGH THE DOLLAR HAD BEEN DEPRECIATING FOR MORE THAN A YEAR. Re c e n t l y r e l e a s e d s t a t i s t i c s f o r t h e t h i r d q u a r t e r PROVIDE MORE ROOM FOR OPTIMISM. ALTHOUGH THE INCREASE IN EXPORTS OF GOODS AND SERVICES CONTINUED TO FALL SHORT OF THE INCREASE IN IMPORTS/ A GOOD PART OF OUR IMPORTS WERE OIL. IF WE EXCLUDE OIL IMPORTS/ WHICH ARE PRICED IN - 6 - DOLLARS AND THUS ARE NOT VERY RESPONSIVE TO EXCHANGE RATES/ OUR FOREIGN BALANCE ACTUALLY IMPROVED IN THE THIRD QUARTER. T h i s is e n c o u r a g i n g / b u t we s h o u l d n o t f o r g e t t h a t o u r TRADE DEFICIT STILL IS FAR LARGER THAN WE EXPECTED/ GIVEN THE HUGE DROP IN THE DOLLAR. O ne REASON FOR A DELAYED IMPROVEMENT IN THE TRADE BALANCE APPEARS TO BE THAT EXCHANGE RATE CHANGES AREN'T BEING PASSED THROUGH TO IMPORT PRICES AS QUICKLY AS THEY USED TO BE. THE PRICE OF IMPORTED GOODS OTHER THAN PETROLEUM DIDN'T PICK UP SIGNIFICANTLY RELATIVE TO DOMESTIC PRICES UNTIL THE SECOND QUARTER OF 1986/ MORE THAN A YEAR AFTER THE DOLLAR BEGAN ITS SHARP DEPRECIATION. A SECOND REASON FOR THIS DELAYED IMPROVEMENT IS THAT THE DOLLAR HAS DROPPED A LOT LESS AGAINST THE CURRENCIES OF SOME OF OUR TRADING PARTNERS THAN IT HAS AGAINST THOSE OF OTHER PARTNERS/ SUCH AS JAPAN AND THE MAJOR EUROPEAN COUNTRIES. IN SOME CASES THE DOLLAR HAS ACTUALLY RISEN - 7 - AGAINST THE CURRENCIES OF SOME TRADING PARTNERS ~ CANADA AND A FEW OF THE SO-CALLED NEWLY INDUSTRIALIZED COUNTRIES/ OR NICs FOR SHORT. THE LARGE DROP IN THE DOLLAR WE ALL HAVE READ ABOUT PROBABLY IS SOMEWHAT OVERSTATED/ BECAUSE MOST OF THE COMMONLY CITED EXCHANGE-RATE STATISTICS EXCLUDE NICs. Tr a d e w i t h t h e s e c o u n t r i e s h a s b e c o m e v e r y SIGNIFICANT. THE SIX MOST IMPORTANT NICs — SOUTH KOREA/ Ho n g K o n G/ S i n g a p o r e / T a i w a n / M e x i c o a n d B r a z i l — a c c o u n t e d FOR FULLY 36 BILLION DOLLARS OF THE TOTAL U.S. TRADE DEFICIT OF 149 BILLION DOLLARS IN 1985. AND SINCE EXCHANGE RATES WITH THESE COUNTRIES HAVEN'T CHANGED MUCH IN RECENT YEARS/ TRADE DEFICITS WITH THEM MAY NOT IMPROVE MUCH IN THE YEAR AHEAD. F i s c a l Po l i c y A n o t h e r m a j o r s o u r c e of u n c e r t a i n t y in the o u t l o o k is FISCAL POLICY. T he E X T E N T TO W H I C H THE G R A M M - R U D M A N - 8 - DE FICIT-RE DUCT ION LEGISLATION ACTUALLY WILL LEAD TO LOWER FEDERAL SPENDING HAS BEEN A SOURCE OF SPECULATION IN THE ECONOMIC OUTLOOK FOR SOME TIME, O n PAPER/ THE CONGRESS OVERSHOT THE 144 BILLION DOLLAR GRAMM-RUDMAN TARGET FOR THE DEFICIT IN FISCAL YEAR 1987 BY THE TEN BILLION DOLLARS THAT THE LEGISLATION ALLOWED, HOWEVER/ BECAUSE OF THE PECULIAR BUDGET ARITHMETIC PERMITTED BY THE LEGISLATION/ THE ACTUAL DEFICIT FOR 1987/ INSTEAD OF BEING 154 BILLION DOLLARS/ IS LIKELY TO REACH 180 BILLION DOLLARS. STILL/ THAT WOULD BE A SUBSTANTIAL REDUCTION FROM AN ESTIMATED DEFICIT OF 221 BILLION DOLLARS FOR FISCAL 1986. A REDUCTION IN THE DEFICIT OF THIS MAGNITUDE WOULD GREATLY SLOW THE FEDERAL GOVERNMENT'S CONTRIBUTION TO ECONOMIC GROWTH NEXT YEAR/ OFFSETTING A LARGE PART OF THE EXPANSIONARY EFFECT OF TODAY'S WEAKER DOLLAR AND LOWER INTEREST RATES. So m e i n d u s t r i e s c o u l d be p a r t i c u l a r l y a f f e c t e d b y th e SLOWDOWN IN GOVERNMENT SPENDING. F or EXAMPLE/ DEFENSE - 9 - CUTBACKS WILL LIKELY CUT GROWTH PROSPECTS FOR THE AREOSPACE INDUSTRY, ALTHOUGH THE IMPACT COULD BE DELAYED UNTIL 1988 OR LATER BECAUSE OF DEFENSE ORDERS ALREADY IN THE PIPELINE. Bu t , a s w i t h t h e t r a d e b a l a n c e , we f a c e a g o o d m e a s u r e of UNCERTAINTY ABOUT HOW MUCH THE BUDGET DEFICIT REALLY WILL DECLINE. I D O N ^ THINK WE*LL HAVE A GOOD FIX ON THAT UNTIL ABOUT THE TIME WE FIND OUT THE WINNER OF THE 1987 WORLD Se r i e s — a b i t l a t e f o r f o r e c a s t i n g p u r p o s e s . On THE revenue side of the budget, the tax reform bill ALSO RAISES UNCERTAINTIES ABOUT THE FUTURE PERFORMANCE OF THE ECONOMY. ASIDE FROM QUESTIONS CONCERNING THE EFFECT OF THE TAX CHANGE ON THE ECONOMY'S LONG-RUN GROWTH RATE, THERE ARE MORE IMMEDIATE QUESTIONS CONCERNING ITS IMPACT ON NEXT YEAR. T he COST OF CAPITAL FOR BUSINESS WILL BE RAISED SIGNIFICANTLY BY THE ELIMINATION OF THE INVESTMENT TAX CREDIT, THE LENGTHENING OF SERVICE LIVES FOR DEPRECIATION, AND THE ELIMINATION OF THE TAX ADVANTAGES TO LIMITED - BUSINESS PARTNERSHIPS, 10 - ALTHOUGH THE REDUCTION IN THE CORPORATE TAX RATE WILL PROVIDE SOME OFFSET/ THE NET EFFECT STILL IS LIKELY TO BE UNFAVORABLE FOR BUSINESS INVESTMENT IN 1987. Ev e n t u a l l y , t h i s n e g a t i v e e f f e c t o n g r o w t h w i l l t e n d TO BE OFFSET BY HIGHER HOUSEHOLD SPENDING IN RESPONSE TO LOWER PERSONAL INCOME TAXES, HOWEVER, BECAUSE OF THE WAY THE TAX REFORMS FOR INDIVIDUALS ARE PHASED”!N OVER TIME/ THE MAJOR STIMULUS TO PERSONAL CONSUMPTION PROBABLY WON'T COME UNTIL 1988. THUS/ THIS YEAR AND NEXT/ TAX REFORM SHOULD HAVE A NET NEGATIVE IMPACT ON GNP/ LOWERING REAL GROWTH BY CLOSE TO 1/2 PERCENT. BUT/ ONCE AGAIN/ IT's VERY DIFFICULT TO BE ON SOLID GROUND PREDICTING THE EXACT IMPACT/ GIVEN THE TREMENDOUS NUMBER OF TAX CHANGES BEING MADE SIMULTANEOUSLY. O il Pr i c e s A final major source of uncertainty about future - 11 - ECONOMIC GROWTH IS THE EXTENT AND DURATION OF DISLOCATION IN THE OIL INDUSTRY CAUSED BY THE DROP IN THE PRICE OF OIL this y e a r . Pr o s p e c t s f o r s o m e i m p r o v e m e n t in t h i s a r e a WERE ENHANCED WHEN THE NEW OPEC PRODUCTION QUOTAS CAUSED THE PRICE OF OIL TO JUMP TO THE 14 TO 16 DOLLAR PER BARREL RANGE/ COMPARED WITH JUST OVER 11 DOLLARS PER BARREL IN late July, If the price of oil stays at around its present LEVEL# THE MAJOR DISLOCATIONS IN THE OIL AND GAS INDUSTRIES PROBABLY ARE BEHIND US/ AND WE SHOULD SEE SOME RECOVERY IN EMPLOYMENT AND CAPITAL SPENDING LATER THIS YEAR AND THROUGHOUT NEXT YEAR, O f COURSE/ THIS ASSESSMENT COULD TURN OUT TO BE OVERLY OPTIMISTIC FOR THESE INDUSTRIES/ SINCE THE OPEC AGREEMENT TO LIMIT PRODUCTION IS VERY FRAGILE. U n c e r t a i n t y a b o u t t h e f u t u r e p r i c e of o i l a l s o r a i s e s A QUESTION ABOUT WHAT WILL HAPPEN TO INFLATION NEXT YEAR. T he d r a m a t i c d r o p in o i l p r i c e s t h i s y e a r c a u s e d b o t h - 12 - CONSUMER AND PRODUCER PRICES ACTUALLY TO FALL FOR THE FIRST FOUR MONTHS OF THIS YEAR/ AND SHOULD HELP TO KEEP INFLATION TO AROUND 2 1/2 PERCENT FOR ALL OF 1986, THIS WOULD BE THE LOWEST RATE OF INFLATION/ AS MEASURED BY THE GNP DEFLATOR/ REGISTERED SINCE 1967, ALTHOUGH THIS IS VERY ENCOURAGING WE SHOULD NOT FORGET THAT/ WITH THE OIL-PRICE "SHOCK"/ INFLATION THIS YEAR PROBABLY HAS BEEN BELOW ITS LONG-RUN/ OR UNDERLYING RATE. Ne x t y e a r / if t h e p r i c e of o i l s t a y s a t its p r e s e n t LEVEL/ AND THUS DOES NOT PROVIDE ANOTHER DOWNWARD THRUST TO PRICES/ THE WEAKER DOLLAR FEEDING THROUGH IN THE FORM OF HIGHER COSTS OF IMPORTS WILL BE THE DOMINANT INFLUENCE ON PRICE MOVEMENTS, In THIS CASE/ INFLATION COULD RISE BY AS MUCH AS A FULL PERCENTAGE POINT OVER ITS EXPECTED RATE OF INCREASE THIS YEAR, HOWEVER/ A COLLAPSE OF THE RECENT OPEC AGREEMENT AND CONSEQUENT FALL IN OIL PRICES AGAIN COULD - 13 PUSH INFLATION BELOW ITS UNDERLYING RATE NEXT YEAR, $0/ ALONG WITH A LOT OF OIL/ OPEC SUPPLIES US WITH A LOT OF "iFS" FOR OUR INFLATION FORECAST. Ch a l l e n g e s t o M o n e t a r y Po l i c y T h e s e u n c e r t a i n t i e s in the o u t l o o k -- t h e t r a d e BALANCE/ FISCAL POLICY/ AND OIL PRICES — FORMIDABLE CHALLENGES FOR MONETARY POLICY. PROVIDE T he ECONOMY'S FAILURE TO SHOW CLEAR SIGNS OF SUSTAINED/ HEALTHY GROWTH/ MAKES IT TEMPTING TO ARGUE THAT/ FOR SAFETY'S SAKE/ MONETARY POLICY SHOULD LEAN FURTHER TOWARD BOOSTING PRODUCTION. C u r r e n t s t a t i s t i c s / h o w e v e r / c a n be a m i s l e a d i n g GUIDE. I t TAKES TIME FOR THE EFFECTS OF MONETARY POLICY TO WORK THEIR WAY THROUGH THE ECONOMY. COMPLICATING MATTERS EVEN FURTHER/ THERE ARE LAGS IN RECEIVING RELIABLE DATA ON WHAT ACTUALLY HAS HAPPENED TO IMPORTANT INDICATORS SUCH AS REAL GNP AND THE BALANCE OF TRADE. SOMETIMES WE DON'T - 14 - REALLY KNOW WHERE WE'VE BEEN UNTIL WE'RE ALREADY SOMEWHERE else, G i v e n t h e s e d i f f i c u l t i e s , a p o l i c y of c o n t i n u a l l y LOWERING INTEREST RATES UNTIL THERE IS UNAMBIGUOUS EVIDENCE OF AN IMPACT ON THE ECONOMY RUNS A REAL RISK — A RISK THAT POLICY INADVERTENTLY WILL BECOME TOO STIMULATIVE/ RAISING THE SPECTER OF REEMERGING INFLATIONARY PRESSURES. By MY CALCULATIONS/ THE EASING OF MONETARY POLICY OVER THE PAST YEAR SHOULD BE CONSISTENT WITH THE ECONOMY GROWING AT A HEALTHY/ SUSTAINABLE PACE NEXT YEAR. BUT ALTHOUGH THIS OUTLOOK IS APPEALING/ WE MUST RECOGNIZE THAT WITH THE ECONOMY POISED TO MOVE TOWARD A FULLER UTILIZATION OF ITS RESOURCES/ INFLATIONARY PRESSURES COULD RE-EMERGE. T h i s i n f l a t i o n a r y r i s k is h e i g h t e n e d in m y m i n d by THE RECENT BEHAVIOR OF THE MONETARY AGGREGATES/ WHICH WE AT THE F ed USE AS INDICATORS OF THE FUTURE IMPACT OF MONETARY policy. T he b r o a d e r m o n e t a r y a g g r e g a t e s , M2 a n d M3/ b o t h ARE NEAR THE UPPER BOUNDARIES OF THEIR TARGET RANGES THIS - 15 - YEAR, T h u s , a l t h o u g h F e d e r a l Re s e r v e Po l i c y a c t i o n s m u s t REFLECT CONCERN ABOUT THE CURRENT SLUGGISHNESS OF THE ECONOMY, WE MUST BALANCE THIS CONCERN AGAINST THE RISK THAT TOO MUCH EASE MIGHT LEAD TO PROBLEMS WITH INFLATION IN THE YEARS TO COME. BALANCING THESE CONCERNS IS THE WAY WE AT THE F e d CAN DO OUR JOB BEST — PROMOTING SUSTAINABLE ECONOMIC GROWTH, WHILE ENSURING THAT CONTINUED PROGRESS IS MADE TOWARD PRICE STABILITY. - 16 Ov e r v i e w of t h e Ha w a i i Ec o n o m y After lagging behind U.S. growth at the beginning of this year/ Hawaii's employment registered a 3.4 percent growth rate between September 1985 and September 1986, much faster than the 2.2 percent rate experienced nationally during the same period. Hawaii's unemployment rate CURRENTLY STANDS AT 4.5 PERCENT/ ITS LOWEST LEVEL SINCE MAY 1980 AND MUCH LOWER THAN BOTH ITS 5.5 PERCENT YEAR-EARLIER LEVEL AND THE 7.0 PERCENT U.S. RATE. THE IMPROVEMENT THAT HAS TAKEN PLACE IN RECENT MONTHS IS DUE PRIMARILY TO IMPROVEMENTS IN THE VISITOR AND CONSTRUCTION INDUSTRIES. A r e a s of c o n c e r n i n c l u d e r e c e n t m i l i t a r y s p e n d i n g c u t s in HAWAII/ AND CONTINUED WEAKNESS IN AGRICULTURE THAT IS PARTICULARLY TROUBLING FOR SUGAR PRODUCERS. T he VISITOR INDUSTRY has REBOUNDED s p e c t a c u l a r l y f r o m ITS DISAPPOINTING PERFORMANCE LAST YEAR. THROUGH THE FIRST NINE MONTHS OF 1986/ THE TOTAL NUMBER OF VISITORS TO HAWAII - 17 - ROSE 15.5 PERCENT OVER LAST YEAR'S LEVEL. THE 1985 TOTALS WERE DEPRESSED BY THE UNITED AIRLINES STRIKE/ PARTICULARLY IN May AND JUNE/ BUT EVEN SO THE UPWARD TREND IS UNMISTAKABLE. I n SEPTEMBER/ THE NUMBER OF VISITORS TO Hawaii was 13.8 percent higher than it was last September/ AND BECAUSE THE STRIKE ENDED IN JUNE THESE COMPARISONS ARE LESS AFFECTED BY THE STRIKE. NOT ONLY ARE MORE VISITORS TRAVELLING TO HAWAII/ BUT ALSO VISITORS APPEAR TO BE SPENDING MORE MONEY. FOR EXAMPLE/ THE AVERAGE HOTEL ROOM RATE ROSE 11.9 PERCENT BETWEEN THE FIRST HALF OF 1985 AND THE FIRST HALF OF 1986. I n ADDITION/ EXCISE TAX COLLECTIONS DURING THE FIRST THREE QUARTERS OF 1986 WERE 11.5 PERCENT HIGHER THAN THEY WERE DURING THE SAME PERIOD LAST YEAR. So m e of the i m p r o v e m e n t in the v i s i t o r i n d u s t r y c a n be ATTRIBUTED TO THE REDUCED FOREIGN EXCHANGE VALUE OF THE U.S. DOLLAR. The NUMBER of eastbound visitors rose 15.1 - 18 - PERCENT THROUGH THE FIRST NINE MONTHS OF THE YEAR OVER LAST YEAR'S LEVEL/ AND LAST YEAR'S EASTBOUND FIGURES WERE UNAFFECTED BY THE UNITED STRIKE, THE INCREASE IN THE NUMBER OF VISITS FROM ASIA AFFECTS THE OVERALL INDUSTRY SIGNIFICANTLY/ AS THESE TRAVELLERS NOW ACCOUNT FOR ABOUT A QUARTER OF ALL VISITORS TO HAWAII. D a t a on m e r c h a n d i s e t r a d e t h r o u g h t h e Ho n o l u l u C u s t o m s D i s t r i c t s u g g e s t t h a t t he b a l a n c e of t r a d e t h r o u g h Ha w a i i PORTS ACTUALLY HAS IMPROVED SO FAR IN 1986/ IN CONTRAST WITH THE U.S. TREND, WHILE NATIONALLY THE GROWTH IN IMPORTS HAS SLOWED IN RECENT MONTHS/ THE VALUE OF IMPORTS to Ha w a i i a c t u a l l y h a s f a l l e n s i n c e l a s t y e a r . T h r o u g h the FIRST NINE MONTHS OF THE YEAR/ THE VALUE OF IMPORTS RECEIVED AT HAWAII PORTS STOOD 8.5 PERCENT LOWER THAN ITS YEAR-EARLIER LEVER. HAWAII'S EXPORT POSITION DETERIORATED/ HOWEVER/ AS THE VALUE OF EXPORTS FROM HAWAII DURING THE FIRST NINE MONTHS OF 1986 FELL BY 30.2 PERCENT FROM THE - SAME PERIOD LAST YEAR, 19 - NEVERTHELESS, SINCE EXPORT VALUE IS MUCH SMALLER THAN IS IMPORT VALUE/ HAWAII'S CUMULATIVE "TRADE DEFICIT" FOR JANUARY THROUGH SEPTEMBER 1986 WAS 2.9 PERCENT LOWER THAN IT WAS IN THE YEAR-EARLIER PERIOD. C o n s t r u c t i o n a c t i v i t y in Ha w a i i h a s b e e n b o o m i n g t h i s YEAR. As A RESULT/ CONSTRUCTION EMPLOYMENT GREW AT A SPECTACULAR 9,3 PERCENT RATE BETWEEN SEPTEMBER 1985 AND September 1986. I n contrast with the national trend, growth in Hawaii has been greater in nonresidential than in residential building. The number of residential permits THROUGH THE FIRST NINE MONTHS OF THE YEAR WAS ONLY 3.4 PERCENT HIGHER THAN IT WAS DURING THE YEAR-EARLIER PERIOD. THE INCREASE WOULD HAVE BEEN MUCH GREATER IF A "BLIP" IN March 1985, due to an unusually large number of multifamily PERMITS AWARDED IN HONOLULU, HAD NOT SUBSTANTIALLY increased the 1986 figure. Nonresidential construction activity in Hawaii has been exceptionally strong, largely - 20 - DUE TO SEVERAL MAJOR HOTEL PROJECTS, THE VALUE OF P R E S I D E N T I A L CONSTRUCTION AWARDS (CUMULATIVE YEAR-TODATE) GREW 13.5 PERCENT OVER LAST YEAR'S LEVEL, IN SHARP CONTRAST TO THE 2,7 PERCENT DECLINE NATIONWIDE AND THE 1.3 PERCENT INCREASE IN THE TWELFTH DISTRICT DURING THE SAME PERIOD. AS PROJECTS CURRENTLY IN THE PIPELINE ARE COMPLETED, THE PACE OF NONRESIDENTIAL CONSTRUCTION IS LIKELY TO SLOW CONSIDERABLY. I n Hawaii, defense expenditures are the second largest SOURCE OF INCOME FOLLOWING TOURISM, AND DURING THE FIRST HALF OF 1986 THEY WERE ABOUT 10 PERCENT BELOW THEIR FIRSTHALF 1985 l e v e l . T he A r m y 's 29 p e r c e n t r e d u c t i o n in SECOND-QUARTER SPENDING FROM THE SECOND QUARTER OF 1985 ACCOUNTED FOR MUCH OF THE DROP, BUT SPENDING BY MOST OTHER SERVICE BRANCHES FELL SIGNIFICANTLY AS WELL. AS IN THE U.S. GENERALLY, AGRICULTURE IN HAWAII IS TROUBLED. THE PINEAPPLE AND SUGAR INDUSTRIES, TRADITIONAL - 21 - MAINSTAYS OF HAWAIIAN AGRICULTURE, HAVE FALLEN ON HARD TIMES IN RECENT YEARS, THE FUTURE OF THE SUGAR INDUSTRY DEPENDS PRINCIPALLY ON PRICE IMPROVEMENTS WHICH ARE UNLIKELY IN CURRENT MARKET CONDITIONS. , I n CONTRAST DEMAND FOR PINEAPPLES HAS PICKED UP IN RECENT YEARS AND INVESTMENTS IN IMPROVED IRRIGATION TECHNOLOGY FURTHER IMPROVE THE OUTLOOK FOR PINEAPPLE GROWERS. "DIVERSIFIED AGRICULTURE"/ WHICH IN HAWAII MEANS EVERYTHING ELSE/ GENERALLY IS PROSPEROUS/ WITH FLOWERS AND MACADAM IA NUTS AS THE CURRENT STAR PERFORMERS, PAPAYAS/ WHICH GENERALLY ARE REGARDED AS A PROMISING CROP/ CURRENTLY ARE SELLING FOR LOW PRICES DUE TO STORM DAMAGE EARLY IN THE GROWING SEASON.
@FedFRASER