Beige Book Report: San Francisco
January 11, 1978
Retail Christmas sales were up by double digits over last year for many Western firms. Since these sales were typically larger than expected, inventories were typically leaner than planned by year end. An apparent end to the drought is filling both agricultural reservoirs and mountain ski lifts, both of which were nearly empty for most of last year. Western firms are still highly liquid and western banks are comfortably liquid, though there were two reports of mild disintermediation. Related to the U.S. trade deficit, concern was expressed over the lack of competitiveness of U.S. goods.
Christmas sales were higher than expected and end-of-the-year inventories lower than expected in almost all areas of the district. Most areas experienced double digit increases in their Christmas sales over year-ago levels. In the Los Angeles area, sales of practically all items, except autos, were up 10 to 15 percent over last year, and this strength has abated only slightly in the post- Christmas period. A Chamber of Commerce survey of another Southern California city found this year's Christmas to be selling 17 percent better than last year's. In Portland, the largest department store reported a 12 percent increase and a large local chain a 21 percent increase in Christmas sales. Particular strength was seen in electronic games, food processors and TV/stereo items, and even foreign autos were selling nicely in Portland. In Seattle, even Christmas-week food sales topped last year's level by 20 percent, according to one large chain. Christmas sales were reported to be unusually heavy among both large and small retailers in various parts of Idaho, and Salt Lake City's major retail outlets were ringing up 12 to 15 percent more sales than a year ago. The only declines in retail sales were reported on an Oregon Indian Reservation and in a drought-damaged agricultural part of Idaho.
The unexpectedly high level of sales left unexpectedly lean inventories. One Southern California city reported shortages in certain lines of toys, women's clothing and small appliances. One large Portland store reported that inventories were depleted a full week to ten days before expected. Lower than planned inventories were reported in virtually every part of the district. One note of concern came from a large California banker who characterized the season as a "credit card Christmas" and feared that optimistic retailers may restock inventories as if such sales would continue, while consumers will begin to feel overextended in their debt load and cut back their spending.
There are reports from the forest products industry that the supply of raw timber is down because environmental groups have blocked timber sales from government lands. The end of the drought has put the Western ski industry back on the road to financial health since extremely good snows are bringing droves of people to the mountains. The weather has imparted mixed blessings on California agriculture. While deepening snowpacks and rising reservoir levels mean more water for farming in 1978, the hurricane-force winds which ripped through California's Central Valley on December 20 have reduced farmers' net income by an estimated 20 million dollars. Up to half of the damage was confined to avocado losses, but damage was also reported in vineyards, citrus and almond groves, some field crops, green houses and irrigation systems.
When asked to comment on press reports of liquidity problems among banks and non-financial corporations, Twelfth District directors responded that such reports appeared exaggerated and alarmist. Two years of strong profit growth combined with modest plant and equipment expenditures was said to have left corporations in strong cash positions. Most major forest products firms are able to fund their planned investments largely through internally generated cash. There was one report of a firm repurchasing its own stock. Overall, there was not a single report of a liquidity problem among Twelfth District firms, and many firms were reported to be in highly liquid positions. The only liquidity problems appear to be among farmers who are squeezed between low prices and high costs.
Most banks also report no liquidity problems, though one Salt Lake City bank hints that strong loan demand may soon spark a rise in interest rates and two Southern California banks have observed some disintermediation. In particular, one of these latter banks reported a 20 percent decline in savings certificate balances between August 1 and mid-December.
Several of our directors commented on the persistent U.S. trade deficit. Some echoed the prevalent explanation that the lagging economies of our trading partners were responsible for weak foreign demand and that our rapid import growth was due to purchases of foreign oil. A natural gas producer recently turned to Japan for "malleable pipe fittings" because U.S. fittings were of such poor quality, and for small trucks because the U.S. did not produce an equivalent product. One banker noted that foreign autos now capture 41 percent of Oregon's new car sales due to their high quality. He also noted that Oregon capital goods producers are losing their competitive edge due to government restrictions concerning ecology, human rights, boycotts and due to relatively non-aggressive action by U.S. export financing agencies (such as the Export-Import Bank).