Beige Book Report: San Francisco
May 14, 1980
Sluggish retail sales, a slumping forest-products industry, and a very weak housing market have led to a general softening of business activity in the Twelfth District. Most analysts agree that a recession has finally overtaken the Western region, especially in the timber area stretching from Northern California, across Oregon, and into Washington and Idaho. However, sharply falling mortgage interest rates in early May provide some hope that the housing industry will come out of the doldrums. Rail shipments of autos and lumber are declining, and the downturn is now spreading to other types of rail traffic. On the farm front, good growing weather has been apparent in most areas except California's Central Valley, but farmers are complaining about low prices for their products as well as the high cost of labor, materials and money.
In Southern California, the signs of an economic slowdown have included a softening of supermarket and department-store sales, significant personal savings withdrawals to finance purchases, a downturn in credit- card transactions, continued weakness in consumer-durable sales, bankruptcies among established auto dealers, and a marked lateness in utility-bill payments. Major Southern California department stores recorded a sales decline of one percent between April 1979 and April 1980, which means a substantial decline in real terms. Thus, nondurable-goods sales are now showing the same weakness that has been apparent in durable-goods sales since last fall. Other sections of the District all report similar developments.
The lumber industry remained very weak in April, with 54,000 lumber mill workers and at least 13,000 plywood workers out of jobs or working a curtailed workweek. The plywood industry has been operating at less than half capacity. About 55 lumber and plywood mills in Oregon have curtailed operations, and some have even shut down permanently, partly because of the recession but also because of the erosion of their timber base. Some major installations have furloughed one-sixth or more of their workers. On the other hand, two major forest-products firms reported record first-quarter profits, reflecting heavy export demand and strong domestic demand for pulp, paper and packaging materials.
Real-estate activity has remained very soft throughout the West. Small builders in particular have been hit hard by the downturn. Builders regained some of their optimism in early May, however, when major lenders retreated rapidly from their 18-percent prime mortgage rate. The nation's largest savings-and-loan association went all the way to 12 3/4 percent. In the nonresidential sector, a major contractor says that demand, while still strong, may decline later because of a lack of long-term financing.
Some areas of strength still remain visible. Defense procurement schedules are continuing to support the Southern California economy. The Puget Sound area remains strong because of Boeing's substantial order backlog. Military business is strong, especially because of Boeing's contract for the cruise missile. Civilian-aircraft production will be reduced next year, however, as a reflection of weakness in domestic-airline orders. As a result, Boeing's workforce is scheduled to stabilize later this year. Meanwhile, Alaska's state finances are in good shape because of a $3.5-billion surplus resulting from its oil boom. The legislature has disposed of part of this surplus by making subsidized mortgages available to residents, and also by boosting legislative salaries.
On the agricultural front, California's San Joaquin Valley has been plagued with freak weather, ranging from high-90's temperatures to snow and rain, during the critical spring-planting period. Dairy producers are suffering from soft sales and from high operating costs. Northwest grain farmers continue to feel the after-effects of the Russian wheat embargo. But crop prospects in the Northwest look good for apples, cherries, hay and seed crops. A deep snow pack and high water tables promise southern Idaho farmers their best prospects of the past four years, especially by allowing crop production in non-irrigated areas.
In the financial sector, most lenders are continuing to tighten consumer-credit terms. Many credit-card lenders have increased the annual interest rate, and some have begun to charge annual fees for card use. Some smaller rural banks report satisfactory operating results because of a stable deposit base. But a Southern California banker reports limited availability of funds to lend despite continued heavy demand for loans.