Beige Book Report: San Francisco
November 14, 1979
The tightening of credit caused by the Federal Reserve Board's policy initiatives of October 6, 1979, has been felt strongly throughout the Twelfth District. Residential construction and resales have been particularly affected, with new lending and building activity off sharply in this area. There have been repercussions in the District's lumber and plywood industries despite continued significant non-residential construction activity. Automobile sales are extremely weak, except in the case of small (particularly foreign) cars. There are few other signs of weakening in the economy; retail sales remain quite strong, harvests have been good, and "boom" industries such as electronics continue to stimulate labor demand. However, there is widespread uncertainty about the future, and considerable pessimism about employment conditions in the near future.
The major change in the economic picture of the Twelfth District from last month is in the housing and mortgage credit areas. The prime mortgage rate is as high as 14% and, in many cases, mortgage money is not available at all. Realtors in most areas report fewer listings and fewer sales in the resale marker and new residential construction has fallen off sharply. The usury laws that are in effect in several states in the District have significantly reduced new mortgage commitments at savings and loan associations. In Washington, for example, a 12% usury limit has caused the two largest savings and loan associations to stop making home loans altogether.
Commercial construction has not been adversely affected as yet because of previous construction commitments. Estimates of the length of the "pipeline" of such activity range from 3 months to a year. Demand for new commercial and industrial space remains very strong in the southern California, Portland, Seattle and Salt Lake City areas. A new 653,000 square foot mall in Salt Lake City, for example, already has 95% of its lease commitments.
Automobile sales are extremely weak in the District, except among small foreign car dealers. The high cost of floor credit and consumer financing is squeezing dealers between increased costs and reduced demand. One dealer of Cadillacs and Buicks feels as if he is "giving the cars away" in order to reduce inventories and avoid $200 per month flooring costs. Some dealers report "half of normal" sales volumes in October. There appears to be little interest in the 1980 domestic models.
In contrast to the gloomy picture in automobile sales, retail sales of soft goods remain strong. A Sears and Roebuck official in Salt Lake, for example, reports sales "way ahead" of last year. Shopping malls in Washington report good business volumes as do merchants in the southern California area. There are signs of caution, however: Seattle merchants are keeping trim inventories and are going into the Christmas season with only 75% of traditional inventories.
Industrial production and employment had fallen off primarily in those sectors affected by developments in the housing and automobile markets. The plywood industry is reported to be "badly off" and lumber mills dependent on housing grade studs and dimension lumber are expected to be hit hard. The Ford Motor Company is laying off 25,000 workers in Los Angeles county in order to work off inventories. A number of bankers in the District expect small and medium sized companies to be in trouble in the near future as high credit costs "reach the bottom line." In the Northwest, the strength of the aerospace and electronics industry is expected to offset the weakness in other industries.
There were scattered reports of reduced capital spending in the District; a major food processing firm, for example, reports holding back on plans to add to its distribution facilities. However, other industries report continuing with previous capital spending plans. A major aluminum manufacturer for example, expects to increase its rate of capital spending by 25 percent in the next few years. The primary effect of this activity will be to gain efficiency and energy savings, however, rather than increase gross capacity.
The agricultural picture in the District is quite bright. Wheat, apples, and poultry production were reported as being particularly high. The diary business is indicated to be "strong," with good feed availability. Seafood prices are currently high, but the effects of high interest rates on the cost of frozen seafood inventories may encourage some liquidation of these inventories with concomitant softening in prices.
The financial markets have displayed a sharp response to the changes in credit conditions. New non-commercial loan demand is sharply down. The commercial loan demand picture is mixed; some bankers report steady demand and other indicate a decline. Similarly, some lenders report strong deposit outflows and others report no net outflows but considerable shifting of deposits to interest-sensitive accounts (MMC's and CD's). There is widespread concern about the future of lender profitability and some evidence of problems. The Idaho State Employees Credit Union, for example, will not be paying a dividend this quarter (for the first time in its history).
A survey of the District's directors indicate that many expect a reduction in inflation in the near term (several months to a year) as a result of the new monetary policy initiatives. Most also forecast a downturn in economic activity in the months ahead.