Beige Book Report: San Francisco
August 10, 1977
In the opinion of our directors, the District economy is expanding at a satisfactory pace in spite of the presence of trouble spots. After a second quarter lull, reports are widespread of a strong resumption of consumer spending in July. Automobile dealers are having trouble stocking everything "from Honda Civics to Cadillac Sevilles," and appliances are selling well, although not to match the strength in housing. There are indications that the upward spiral of housing prices, especially in California, has leveled off as higher tax assessments have swelled the supply of large houses up for sale. On another front, there are early indications of a pickup in nonresidential construction, mostly commercial buildings and power plants. Agricultural prices have plummeted on a broad front as harvests are abundant in spite of reduced acreage this year. The drought is having uneven repercussions throughout the District.
Although a trend towards slower retail sales growth in the second quarter was noted across District states, many areas now report renewed strength in July sales, up about 9 percent over last year. In Southern California, sales of hard goods, primarily automobiles, continue brisk and soft goods too have been picking up. In Orange County, retail sales are running 22 percent over last year. Heavy appliance sales have not kept pace with the rate of new housing starts since most buyers owned houses previously, but sales have been satisfactory nonetheless. In agricultural areas of the District such as Eastern Oregon and Washington, the drought has cut into income and the farmers are making their current stock of durables last longer. A California survey of sales projections for the third and fourth quarters by product line show high expectations for portable color televisions, and sporting equipment and some expected weakness in sales of microwave ovens, small cars and bicycles.
Boeing's backlog of orders is $1 billion higher than last year and earnings have doubled. Boeing's prosperity is generating employment and income throughout the Seattle area, but its capital investment is being directed solely toward productivity improvements. In California, the B-l decision did not cause "that much of a problem" since the 8,000 workers laid off amounted to only ".2 of one percent of total nonfarm employment in southern California". The forest products industry has reported good profits for the first half of 1977 and the future appears good for the lumber and plywood industry. On the soft side, order backlogs for paper and pulp are beginning to shrink slowly. International pulp demand has dropped and so have prices. High labor costs at mills are squeezing profits and some Oregon lumber mills are closing.
In southern California there is some feeling that the rapid price spiral for housing has wound down and that "real estate inflation has leveled off for at least the next year". More people are now inquiring about home improvement loans. The inflated price situation has caused the placement of many large houses on the block, especially since tax assessments are now being made that reflect the higher sales prices. Unable to afford to live in Orange County where the basic price of a new home is now $100,000, workers have moved to nearby Riverside County.
Although not buoyant, an increase in demand for nonresidential construction is becoming evident throughout the District. Held up largely by difficulties in plant site location, business is running about six months behind in making capital expenditures after appropriations have been approved. Office space is said to be getting tight in Los Angeles and in Beverly Hills as well, the chosen focal location site for the area's international firms. In mid-July a building permit was filed in Kern County, California, for a nuclear power plant west of Wasco; in July, a $2 billion power plant contract was awarded in Arizona. One Director states that building large power projects was the only way to avoid New York's power problems. The short-term gas supply, however, is in good shape with storage at high levels and he believes the situation is good in the East as well.
Across District states, the drought is having uneven effects that change in severity from month to month. The news from the San Joaquin and the Coachella Valleys in California is mostly bad; over the past month the price of cotton declined and the price of alfalfa plummeted. This has been beneficial for the dairies where costs have dropped and profits have risen. Crop production in the Central Valley is 5 to 7 percent higher than last year yet a lot of acreage is out of cultivation. One young farmer has aroused interest by planting peach, plum and nectarine trees 389 to the acre compared with the usual 108 to the acre and using drip irrigation methods which save water and reduce power bills.
Some concern is being voiced by District bankers that the high volume of consumer loans might be a source of trouble in the event of a 1978 economic slowdown.