Beige Book Report: San Francisco
October 14, 1970
Businessmen and bankers in the Twelfth District appear to take a restrained view of current economic conditions. Although there is now no expectation of a marked decline in the economy, there is also no expectation of an early return to a vigorous expansion. The consensus is that the economy is at a plateau and businessmen are consequently making plans in line with that expectation. This opinion is supported by reports from bankers that despite the recent reduction in the prime rate there has been little basic change in either deposit flows or in their lending policies.
Construction trends mirror the economic trends. The demand for single-family homes remains weak in most areas with buyer resistance to high prices and hesitancy because of expectations of lower interest rates. Apartment construction shows strength in some areas but not in others, and there is considerable variation from area to area in commercial construction. The principal weak spot is still in Seattle where aerospace employment has been cut back. Seattle construction activity has fallen off sharply with the lack of demand. Vacancies are high in Seattle (in some suburban areas near 25-30%) and rents are being shaded. A rise in foreclosures is reported. Elsewhere in the District, vacancies are not at such high levels and there are still a few areas where vacancies are quite low. Rents have tended to remain steady or be increased by nominal amounts in areas other than Seattle. The principal weakness remains in the demand for higher-priced single-family homes. For the District as a whole, construction activity is proceeding at a moderate pace.
On the financing side, there have been small increases in the availability of funds, and one respondent reported the return of a few insurance companies to the residential mortgage market. Despite this somewhat greater availability, mortgage rates have not declined to any extent. They remain either unchanged or are down only 1/4 percent. The only significant change is a reduction in the interim-financing rate from 14 percent to 12 percent in southern California.
The prime rate reduction is described by local banks as a competitive response and not one that is justified by either improved liquidity or reduced loan demand. Most banks have been gaining both demand and time deposits and are in a slightly better liquidity position, but the improvement is not felt to be of sufficient magnitude to justify the prime rate reduction. Loan demand remains high or at worst only slightly lower, and most banks have not changed their basic policy of continuing to be restrictive in their lending. There are a few banks which reported a slightly more aggressive policy of seeking new loan accounts, but only those of good quality and at an appropriate rate. There are other banks which have gained funds and have treated them as transitory, using the funds for investments of similar maturity and not for expanding loans. Overall, the prime rate reduction to the contrary, banks have not experienced any major change in financial conditions.
Retail sales continue to hold up well even though they may be rising at the rates below those achieved in recent years. One national food manufacturer reported that, despite increases, the sales of food products generally were not quite up to expectations. It was felt that one reason for this slower pace was inventory restrictions by wholesalers who are trying to maintain their cash positions by lowering inventories. This same firm also reported problems in making deliveries because of a shortage of rail cars and it has resorted to leasing cars on a yearly basis to insure deliveries.
Retail food prices are holding steady in most areas, and in some lines they are falling because of special allowances to meet intensive competitive activities. Several large supermarket chains have recently shifted to a discount basis and are stressing lower prices in their advertising.
Building costs continue to rise and to have a dampening effect on new projects. Construction wages are higher in all areas (even in Seattle where the volume of housing construction has fallen off) and, except for a few isolated instances where competition has forced some price reductions, the cost of building materials is also higher. One banker felt that the high cost of new housing forces more buyers out of the market than the scarcity and high rates of mortgage finance.
In conclusion, businessmen and bankers in the Twelfth District expect that economic conditions will hold for the moment at the current slower pace and that there has been no basic change in either the business or financial situation.