Beige Book Report: San Francisco
April 12, 1978
The Twelfth District economy continues to emit signs of health. Retail sales continue to grow, especially from earlier rain-depressed levels in Southern California. Most firms report that inventories are at desired levels, though two note that policy changes have lowered their target inventory-to-sales ratios. Very strong real estate demand has resulted in recent increases in mortgage rates throughout the West and some observers anticipate even further increases.
Retail sales continue generally strong in the West. In Southern California, March retail sales rebounded from the rain-depressed February levels (by 18 percent unadjusted, according to one survey). Auto sales in that area appear to be much stronger than they have been nationally. Auto sales are also reported to be strong in the Pacific Northwest. An Oregon-based distributor who supplies foreign cars to a five-state area reports that March was his best month since last August. There were, however, reports of slow domestic auto sales. While the depressed farm economy has seriously retarded sales of farm machinery, retail sales in rural areas are said to be respectable. One Seattle-based food distributor reported record sales in March. Another Seattle observer forecast continued strong retail sales in that area due to the immigration stimulated by the Boeing expansion. The only pessimistic note on retail sales comes from Alaska where the economy is said to be adjusting to the post- pipeline-construction era.
Inventories appear to be at desired levels at all stages of production in most parts of the West. Exceptions to this include: larger than desired inventories of domestic autos, many raw farm commodities (like potatoes and beans), some processed farm goods (like canned tomatoes), coal (due to pre-strike stockpiling), building materials (due to bad weather), and petroleum distillates. Leaner than preferred inventories are reported by a clothing manufacturer and a lift-truck manufacturer. Two firms reported a change in inventory policy, the result in both cases being lower inventory-to-sales ratios. One is an electronics manufacturer which attributed the change to a new accounting procedure, and the other is a large diversified firm which claims that "aggressive inventory management techniques" have enabled it to operate with less inventory than in the past.
Among major manufacturers, Boeing reports increased inventories to accommodate its rising rate of production. Kaiser Aluminum notes that aluminum industry inventories are currently at desired levels, but there is concern about shortages in the near future.
Within the past few weeks, most Western states have experienced increases in the prime residential mortgage rate and most observers and bankers attribute the increase to very strong demand, sometimes accompanied by a slowing in the rate of consumer savings deposits. California appears to be leading the District with 80-percent loans currently costing 9 3/4 percent; up from 9 1/2 percent only a few weeks back. Demand is reported to be so strong in Central California that S&Ls are refusing loans to buyers who do not plan to occupy the house. In the Pacific Northwest mortgage rates have recently risen from 9 1/4 to 9 1/2 percent and are expected to rise even further since they typically lag the California market by 3-6 months. Some observers expect rates to reach 10 percent during the year. While a couple of bankers noted increased cost of funds as a partial reason for the rise, most appeared to feel that this cost increase was inconsequential, and the major reason was that the demand for funds was growing more rapidly than the supply of loanable funds.