Beige Book Report: San Francisco
August 5, 1980
The recession continued to affect Twelfth District statistics during the early-summer period, although a few signs of an upturn have been seen in homebuilding and certain other sectors. Retail sales remained slow, inventories remained high, and manufacturers' orderbooks became slimmer during this period. Unemployment remained high, and it may continue to increase as the recession affects a wider range of industries throughout the District. Most observers now expect prices to stabilize in many non-food sectors, but in contrast, they expect food prices to rise substantially because of nationwide weather problems.
Some directors believe that the sharp declines in housing and auto sales have not yet been fully reflected throughout the economy. As a result, unemployment may continue to rise in durable-goods manufacturing and retail trade. Auto dealers, in particular, appear to be in trouble in Southern California and other regions. Some dealers have survived only because of the equity they hold in their dealership real estate.
In the retail area, many small businesses are in trouble. However, several large Southern California department-store chains posted 12 percent year-to-year gains in June—far above the national-average increase—and Southern California fast-food chains also reported good results. In tourism, increased cancellations are plaguing the Northwest hotel and motel industry, despite the rapid clean-up after the Mt. Saint Helens' eruptions. Resort areas untouched by ash—such as the Oregon coast—also are experiencing a falloff in tourist traffic, due to the recession and high energy costs.
Western railcar loadings fell about 10 percent below year-ago levels in June, because of a downturn in industrial production and a softness in the forest-products industry. One major aircraft producer reported a decline in sales because of the nationwide weakness in airline travel. Meanwhile, a major aluminum producer recorded its second highest earnings figures in history during the second quarter, despite the recession. However, aluminum sales and earnings probably will weaken in the second half because of a downturn in orders.
Homebuilders in California report a paradoxical situation: a strong demand exists for residential dwellings, but home construction remains in the doldrums. Potential buyers are experiencing financial difficulties, while the inventory of available homes is declining. Meanwhile, commercial construction is still booming throughout most of the West, although it remains plagued by materials shortages. Construction costs are expected to increase further in Southern California, because of very large wage increases recently negotiated. The Northwest lumber industry reported improved inflows of orders in the early-summer period, but production remained far below normal. Also, the unemployment rate in lumber-oriented Oregon counties remains in the range of 20-25 percent.
The short-term energy picture in California and elsewhere remains relatively bright, mainly because of reduced consumption during an abnormally warm winter plus adequate current supplies. Plenty of gasoline is now available for consumers, but the region still faces the long-term problem of import-dependency. The Northwest, meanwhile, reported a current surplus of hydro-electric power.
Most agricultural leaders reported soaring prices of farm products, such as cattle, grains, fruits and vegetables. Weather-caused shortages elsewhere in the country suggest that farm prices will remain high, leading to an upsurge in consumer food prices later in the year. In the Northwest, the Mt. Saint Helen's eruptions created significant damage to apple, pear and hay crops—although recent damage estimates are far below those reported just after the eruption.
Financial institutions throughout the West reported an increase in passbook savings. For example, one major bank in Southern California witnessed a savings inflow of $10 million per day in late June. In this area, certificates with 2 to 3-year maturities were also strong, although some weakness was evident in the sale of money-market certificates. Commercial-loan demand remained weak in California, except from construction firms. Some improvement was evident in real-estate loan applications, which should later be translated into an upturn in housing starts.
Many small business firms throughout the West are still very cautious about borrowing plans. The first-half interest-rate volatility, as well as the abrupt recession-caused decline in demand, have reduced borrowing needs of such firms. Small businesses apparently have been increasing their commercial-loan demand only slowly in response to lower interest rates.