Beige Book Report: San Francisco
September 9, 1980
Uncertainty and concern about economic conditions continues to be widespread throughout the Twelfth District, where concern centers on current and expected inflation. While some observers have indicated that the recession may be over, the general consensus is that claims of an economic recovery are premature. The recession is expected to continue throughout the year with recovery coming in the early part of 1981. Recent increases in interest rates are said to be having a strong dampening effect on the recovery in housing. Retail sales and credit card use continue to be sluggish. The agricultural and industrial sectors are reporting that sales and profits are strong. However, fears are expressed about rising input and labor prices. Losses in the Northwest due to the eruptions of Mt. Saint Helens have been less than initially anticipated and the region appears to be moving back to normal conditions. The inflow of deposits to banks and savings and loans remains strong despite the rise in interest rates.
Consumer Sentiment is still decidedly pessimistic. Concern is expressed as to whether consumers in the near future will have either the ability or the willingness to resume spending. Uncertainty about economic conditions is cited for the low level of consumer attitudes. Consumer debt has been decreased and so has credit card use. However, a few areas report that auto and truck sales appear to be showing a slight rise from the low levels of the past months.
The recent increases in mortgage rates are dampening the recovery of the housing industry. With some areas reporting mortgage rates as high as 13 1/2%, a downturn in home purchases and new construction has been reported. A mortgage rate in the 12% - 13% range is felt to be necessary before any significant recovery in the housing market could occur. With the rise in short term interest rates creating the fear of an outflow of savings deposits, the increased demand for funds in the bond market, and the recent rise in inflation expectations, no significant decrease in mortgage rates is anticipated for the rest of the year.
The unemployment figures remain largely unchanged from the previous period. Expectations of increased employment were expressed in a number of areas due to plans for expansion by firms. The possibility of adverse effects created by strikes and increases in wage demands was raised. "Catch-up" wage increases, along with declines in productivity, are anticipated to greatly increase labor costs.
Retail sales volume continues to be low but some feel that the bottom has been reached and that increases can be expected for the remainder of the year. Weak credit card sales were blamed on the reluctance of consumers to increase their installment debt, resulting in a low demand for durables. It was felt that significant increases in sales would not occur until consumer confidence and real personal income increase.
The general state of industrial and agricultural activity is regarded as good to very good. Despite decreases in domestic airline business, one major aircraft producer remains at a near record level of activity. Agricultural prospects remain bright as many areas are reporting output well above projections and earnings prospects are good. However, weather conditions have had an adverse effect on crops such as cherries, potatoes, and grapes. The lumber industry continues to be sluggish as a result of the Mt. St. Helens ashfall and the general weakness in the economy. Low lumber inventories present the potential for a price explosion once housing rebounds.
Mt. Saint Helens still is a major topic of discussion in the Northwest. Hardest hit by the ashfall were the agriculture and tourist industries. The lumber industry reports that some operations are returning to normal for the first time since the first eruption. Shipping traffic has returned to normal in many areas. The tourist industry has been depressed by adverse publicity created by the ashfall and recent eruptions. Campaigns to counteract this publicity have met with some success. However, tourism is still down and is felt to be a significant factor in the low level of retail trade in the area. But most observers conclude that the losses due to the ashfall will be substantially smaller than originally estimated.
The current rise in interest rates has touched off concern in some financial institutions. Of primary concern is the fear of an outflow of deposits to money market funds. But no such outflow has been felt yet, and deposits have been recovering from the drop in earlier periods. Aggressive marketing, especially for 2 1/2-year time deposits, is cited for the lack of deposit outflow. One respondent reports a sharp increase in commercial loans. Concern is expressed over possible bankruptcies and loan losses, although these are not yet a reality. The earnings picture created some comment, as profits were down at many financial institutions.