Beige Book Report: San Francisco
September 9, 1970
There is a somewhat more optimistic tone to the comments received this month from Twelfth District bankers and businessmen. The immediate pace of economic activity has not moved toward a higher rate of expansion as yet, but the general feeling seems to be that the worst of the current slowdown is over and that there will be a recovery toward the end of the year, or in 1971. Much of this optimism is based on expectations of easier monetary conditions.
In the meantime, the current situation has not changed from recent months. Businesses are not reporting major expansion plans and are still under pressure to reduce costs. Several reports stress continuing efforts to keep costs under control. In some cases, these efforts have taken the form of layoffs of both production and clerical workers. Several firms have raised prices partly because of rising costs and partly to offset revenues lost from falling sales.
A common response has been to attempt to cut inventories or at least prevent them from rising. A frequent explanation for the emphasis upon inventory reduction has been the high cost of finance; this is especially true of smaller businesses. Lower sales have also been a factor, although the lower sales have resulted in inventories being somewhat higher than intended. One firm reported that it announced a price rise and gave its customers a chance to make price-protected orders. The response was smaller than expected and this was interpreted as suggesting that customers would rather pay a higher price later than build up inventory now.
One exception to this trend is in the oil industry where inventories are being built up in certain products, despite a slight decline in total inventories. Crude oil inventories are being kept at above normal levels as a cushion against anticipated periodic foreign crude supply shortfalls during the remainder of 1970. On the other hand, light-product inventories are being kept at minimum level to reduce carrying costs.
As before, the areas with the greatest problems are those dependent upon the aerospace and lumber industries. The Pacific Northwest, in particular Seattle, and to a lesser extent, southern California, reported continued heavy unemployment, and, especially in the Seattle region, rising vacancies in real estate. Retail sales in the Pacific Northwest, while not actually falling, were described as comparing unfavorably with the same period a year ago. The rise in unemployment in the aerospace industry in southern California has not had as marked an impact since the local economy is more diversified. Nevertheless, retail activity is slower than normal, as is true of most areas.
A few regions have experienced what they describe as a good year. This is the case for Utah, Idaho, and parts of Nevada where the local economies are more dependent on agriculture and tourism. Tourist expenditures were at normal levels. Yields from the principal crops are very promising and prices for agricultural products and livestock are expected by farmers to hold at present prices. Banks in these areas reported that their customers had a year approximately as good as last year, if not better. Retail sales, in consequence, have held up in these states and inventories have not fluctuated much during the past few months.
Housing continues to show some strength in multiple units (except in the Seattle area) but not in single-family homes. For single-family homes, both construction of new units and sales of existing homes have fallen off compared with 1969. There has been some increase in the availability of funds and some reduction in interest charges, which, it is expected, will help the housing market.
Bankers in the Twelfth District report a continued buildup of deposits and an easier liquidity position. Some commented that they are not bidding as aggressively for long-term CD's and others noted that the public is increasing its savings. Although the banks are continuing to exercise care in their lending, they have been able to ease up somewhat on their restrictions and in some cases are looking for new borrowing customers. These moves to greater ease are still minor and lending is still carefully scrutinized.
In summary, the reports indicate a shift toward more optimism even though no immediate improvement is being felt. Unemployment has not started to fall and firms continue to devote efforts toward cost and inventory reduction. The general impression seems to be that the economy will begin to expand at a faster rate by the end of the year.