Beige Book Report: San Francisco
May 12, 1976
Our Directors report a continued expansion of the economy led by strong consumer spending. Retail sales and new car purchases are good in most areas of the District and consumer credit demand has increased. Another strong sector is agriculture where prices have been steady and an optimistic outlook prevails. Construction shows great variation from region to region and overall its recovery has been slow. A major concern is the high wage and fringe benefits sought by unions in current negotiations. Bankers report high savings rates and strong loan demand by consumers but a relatively weak demand for commercial and industrial loans.
Consumer spending is the strongest force in the economy. Our Directors report generally good retail sales throughout the District. Increases of 20 to 30 percent in sales over a year ago were reported in some areas and this strength is expected to be maintained. Automobile sales, especially for domestic cars, are also very good. In Oregon, for example, one domestic company experienced a 48 percent increase in sales during April over a year ago. A shortage of inventory exists for the larger models. Consumers are increasing their indebtedness and consumer lending is up strongly at most banks. At a large Washington bank, installment loan totals for the first quarter of 1976 were up approximately 25 percent over the previous year. Auto loan increases were even higher for this same Washington bank, and other banks report similar increases.
The agricultural outlook is good. Prices have been reasonably steady with only limited declines in prices expected. Cattle prices are up and an excellent year is predicted for such crops as cotton, rice, potatoes, and fruits. However, there remains some uncertainty about the impact of government intervention on farm exports which could depress certain prices of certain crops such as wheat.
Heavy construction remains weak and architectural firms are continuing to cut back on staff. Unemployment in the construction trades remains high. Residential construction shows great regional variation. It is described as being at "all-time high levels" in the Bakersfield area, and sales of new homes are being made at record prices in Orange County in Southern California. Prices of existing homes are continuing to climb. These strong local markets are an exception and the modest recovery in demand by the housing industry is reflected in slow growth of orders experienced by lumber and plywood producers.
Inflation continues to worry some Directors, primarily because of the wage increases being demanded by unions in current contract negotiations. A large paper products manufacturer foresees a "very expansive settlement", possibly 14 to 15 percent plus benefits. The effect of fringe benefit improvement could be very costly especially when the funded liability for greater pensions is considered. On the other hand, another Director reported that inflation is not likely to be important in the food industry. Retail price wars occurring in some areas reflected recent declines in food prices, but neither substantial increases nor decreases are expected during the rest of this year.
Inventory accumulation does not appear to be a major source of demand in this District. Finished inventory at a precision electronic instruments company is unchanged since last August and other manufacturers do not appear to be increasing inventories. In fact, some indicate that they are continuing policies aimed at reducing inventories. Bankers have experienced little increase in loan demand to finance higher inventories.
Directors noted some problems connected with environmental issues. The recent abandonment of a large coal power plant in Kaiparowits in southern Utah removed an important source of potential economic stimulus for that region. Environmental regulations are also described as causing delays in coal mining projects in Utah and construction projects in Southern California. One Director noted the conflict in the proposal for a large nuclear plant situated in prime agricultural land in the San Joaquin Valley in California rather than on the coastline. In his view, agricultural land is as desirable a goal as preserving the coastline of California.
Banks continue to gain deposits. Savings at a large state-wide California bank were up 25 to 30 percent over the last 12 months. Demand for loans is strongest for consumer credit but it is quite variable in the case of commercial and industrial loans. Although individual small banks report good demand, the larger banks see little evidence that the confidence level of business matches that of consumers. Commercial loans remain weak; the loan demand is not there.