Beige Book Report: San Francisco
June 17, 1970
This report is based upon a survey of Head Office and Branch Directors, supplemented by reports from selected businesses. The general opinion is that the economy is experiencing a mild slowdown, and there is no expectation of a complete recovery until the end of the year. At the same time, there is little optimism that inflation will be brought under control quickly. Consumer demand continues to be high, although sales are somewhat slower than last year, and there is continued demand upon banks for credit. The adverse effects of the slowdown appear in two principal forms. Unemployment is seen to be much higher this year, and many firms report experiencing a profit squeeze. They say that they are unable to offset by price increases or greater sales volume their higher costs. In consequence, they are attempting to cut expenses by reducing staffs, cutting inventories, and delaying capital protects.
Unemployment has risen in most parts of the District. The highest levels are in the Pacific Northwest where the principal problems are centered in the lumber industry and Boeing Aircraft. Boeing is the principal employer in the Seattle-Tacoma area, and it has cut its employment from over 100,000 in 1968 to 58,000 now, with further layoffs announced for the rest of this year to reduce the level to 43,000. Lumber operations have been at a reduced pace throughout much of Washington and Oregon. Apparently the smaller mills are bearing the major burden, while the large integrated mills continue to maintain production. There is some expectation of a recovery, at least in Oregon, toward the end of the year. The other area with a major unemployment problem is southern California, where the affected industries are aerospace and, to a less extent, housing.
Construction of new residential housing and the opening of new subdivisions continue to be slow. The decline in demand is heaviest in the Seattle area because of the layoffs at Boeing. The principal strength is in commercial construction. This is certainly the case in California where commercial building remains high. In many cases there is also a strong demand for mobile homes. This particular change may be part of a tendency for consumers to downgrade the quality of their housing demand.
Retail sales remain relatively steady despite the rising unemployment, and they continue to be a source of strength in most areas. For most kinds of consumer goods, there is no sign of downgrading in choice of items as a means of economizing. Consumers are reported to be more careful in watching for and responding to sales, but there is no pronounced shift to lower grade goods. When purchases of major appliances are made, the demand is still for the higher-grade line. Replies from major department stores indicate the general composition of their business is not changed, although sales are not rising at last year's pace.
There is one major exception to this picture. Reports from throughout the District indicate that consumers are economizing on their automobile purchases. They are shifting away from middle-line models to lower priced and foreign economy cars, although luxury car demand remains high. As part of this shift, there appears to be an increased demand for late model used cars. Therefore, there is evidence of both a reduction of automobile purchases and a downgrading of quality of purchases.
The recent decline in the stock market has not had any noticeable impact on consumer purchases, but it does seem to contribute toward creating more general uncertainty on the part of businessmen. One specific example of the effect of lower stock prices reported is those cases where stock had been used as loan collateral and the borrowers were forced to sell at a loss to cover the loan.
Many businesses report that their profit margins are being narrowed by higher costs, especially labor costs and by an inability to raise their revenue. Sales are not rising to offset the costs, and general price increases are not always feasible. In consequence, there is more emphasis upon cost reductions. This takes various forms: closer controls over inventories, increased layoffs of employees, and in some cases postponement of capital projects. In fact, one of the clearest responses of individual businesses to this combination of smaller profit margins and continued high interest rates appears in the reduction of capital spending. One large oil company, for example, describes its projects as being continuously reviewed, and several other manufacturing companies report a postponement and reduction of planned expenditures.
Financial pressures are also an element in the slowing of business capital expenditures. Several companies reported credit stringency and high interest costs as factors leading to a revision in their plans. In one case, foreign financial conditions caused difficulties for one company; foreign banks were unable to supply funds normally utilized by this business. Financial conditions continue to be cited as an important adverse factor influencing the construction industry. This is in spite of deliberate efforts by banks to allocate funds to meet this demand. Banks are continuing to be selected in the kinds of loans that they make.
In summary, reports of our directors and other businessmen point to a slowing of the pace of economic activity and a greater reluctance on their part to undertake major expenditures in the near future.