Beige Book Report: San Francisco
February 21, 1978
After a very good fourth quarter, retail sales have slowed—most notably in Southern California. Western production continues to grow moderately, reaching full capacity in some industries. While some industries have very low inventories and most are at desired levels, the petroleum and natural gas industries are characterized by excess inventories. While there is concern about disintermediation, only a few banks have actually noted savings outflows. Because deposits have been growing less rapidly than lending, several thrifts have temporarily left the mortgage market.
After several months of depressed sales, some auto dealers report a pickup in sales beginning in mid-January. And after a record fourth quarter, retail sales in the Los Angeles area were fairly poor in January—a phenomenon which might be attributable to the unusually heavy rains.
Production levels remain steady to growing in most western industries; full capacity is close at hand for some; and the inventory picture varies from thin to fat. The primary aluminum industry is producing at or near capacity and there is actually a capacity shortage in aluminum rolling (a stage into which half of all primary aluminum enters). Demand for fabricated aluminum products has been much higher than one would expect during winter months. In the aerospace industry, Douglas recently obtained a government order for 20 DC-l0's and Lockheed received a request from Delta Airlines for 5 Tristan jetliners. The employment and income effect of the stimulus should continue for several years.
The energy field appears to be characterized by excess inventories of natural gas and petroleum products, though there is much concern expressed over the continuation of the coal strike. A mild winter has resulted in large gas inventories (up 25 percent over year-ago levels according to one producer) and an eagerness among gas producers to make sales on favorable terms. There is also reported to be record inventories of petroleum products and an associated increase in competitiveness in that industry.
Agriculture is receiving mixed blessings. With the drought declared officially over in virtually all western states, farmers are assured of all the water they need over the next year. Unfortunately, the storms which brought the rain have caused quite severe damage to a number of California farms. At least one county, in which dirt and dust storms filled irrigation canals as well as some orchards, was declared a disaster area. Because of the damage done to some vegetables, like carrots, green onions and lettuce, local prices have risen sharply—a reported tripling of price in the case of lettuce.
While construction activity continues at a steady pace in most parts of the District, houses are not selling as quickly as they were a few months ago. In contrast to the queues that were forming outside new developments in Southern California last year, today the average house is not sold until two months after completion. In the market for existing housing, it also takes about two months to sell and sellers are now getting 95 rather than 100 percent of their asking price.
While there is still concern over the possibility of disintermediation, only two banks report having observed any decline in savings deposits. One small Southern California bank noted that its savings deposits had fallen off in January by about 5 percent more than the seasonal norm. A large California bank observed "some degree of outflow of savings deposits from banks and thrift institutions in November and December," and expressed concern over the Fed's further tightening in January. This bank argued that the housing industry would be jeopardized if the 90-day T-bill rate moved above 7 percent. While most other banks surveyed had observed no savings outflow, some noted a significant slowing in the rate of growth of deposits and others spoke of an increasing frequency of customer inquiry regarding T-bill auctions. Still other banks noted a shift in the composition of savings toward the higher interest rate certificates.
There is some concern in the Twelfth District over the impact of rising money market rates and consequent savings outflows on the housing sector. Mortgage rates have increased by 1/4 percent in many parts of the District, though there has been little dampening of demand observed. A number of Oregon thrifts have adopted a 60- to 90-day moratorium on lending. Thrifts in one area of California have ceased making loans on multi-family or non-owner occupied properties. Several Idaho banks report that credit availability for housing over the coming year will depend largely upon whether the agricultural sector will liquidate its loans on schedule and how heavy agricultural loan demand will be over the coming year. The only dissent from this tight mortgage credit scenario, comes from the CEO of a large bank holding company, who argues that given weak commercial loan demand, banks will continue to remain quite active in granting real estate credit.