Beige Book Report: San Francisco
December 9, 1970
The general consensus of businessmen and bankers in the Twelfth District is that there has been no major improvement in the pace of economic activity. There have been some favorable factors, lower interest rates, for example, but the impact has not been sufficient to produce any major change in spending plans.
The principal problem area in this district remains the Pacific Northwest where the aerospace and timber industries are depressed. The most severe unemployment is centered in the Seattle-Tacoma region due to the cutbacks at Boeing. In Seattle, retail sales are below those of last year and vacancy rates are high for both commercial and residential property. In both Oregon and Washington, the timber industry shows no sign of recovery and individual mills are continuing to lay off employees. The aerospace cutbacks are also a significant factor in California's unemployment. Although the aerospace and timber industries have the most obvious difficulties, there remains a widespread weakness across the district in manufacturing of all kinds. Firms report that they are continuing to hold back on orders and in some cases reducing employment. In Arizona, layoffs in manufacturing continue, in contrast to a rising trend in employment in other sectors. In Southern California, one banker, after surveying local industrial parks, reported a noticeable increase in the number of buildings either empty or up for lease. There is no evidence of any shift toward rebuilding inventories. Policy is still directed at keeping inventories down and keeping production geared to actual orders.
Investment plans show a mixed pattern. One major oil company reports it is carrying on its capital projects in conformity to its long-term investment plan. Another local firm which is a supplier for the construction industry has deferred all of its expansion plans until there is a recovery in its orders. On balance, investment expenditures are continuing, but at a moderate pace.
Retail sales, apart from those of automobiles, have been steady. They are above those of last year in most areas, again with the exception of Seattle. The reduction in the prime rate has been regarded by most banks as a reaction to money market trends and therefore any other changes in their policies have been marginal. Some banks are rebuilding liquidity while others are attempting to expand their loans. In some cases, banks are making loans to customers whom they previously would have turned down, while other banks are looking for prime borrowers without otherwise changing their lending policies. For nonprime loans, the rate decline is not in proportion to the cut in the prime rate, principally because nonprime rates had not been increased in proportion initially. Some rates on loans are being cut immediately, others as they are renewed, according to the individual bank's policy.
The banks as a whole expect mortgage rates to fall even more slowly. In some instances this is because demand remains high, while in others the rates had already fallen somewhat. In contrast to mortgages, rates for interim construction loans in California have declined by approximately one percentage point. Part of this decline is due to the easing of other rates, but part is due to increased competition by real estate investment trusts whose activities have been growing.
District bankers generally report improved liquidity positions and they are responding on the liability as well as the asset side. Some are cutting their CD rates while others are reducing their Eurodollar borrowings.
The prime rate reduction has had only a minor impact on the businesses of our nonbank directors. They are, of course, pleased to pay lower interest rates but none reported that their investment plans have been affected by the lower cost of funds. Some said they might be prepared to carry more inventories than otherwise, but there were just as many who were making no change. The general reaction was that the prime rate reductions were beneficial in principle to the longer-term business outlook. Businessmen remain cautious and are continuing to try to keep costs under close control. The most common assessment of future trends is for only a gradual recovery in 1971.