Beige Book Report: San Francisco
December 10, 1980
Fears of a downturn in the economy are widespread throughout the twelfth district. Expectations are that the recent increases in interest rates will exacerbate the recession. The swings in interest rates have made doing business more difficult and businesses more cautious. Retail sales are stagnant, but hopes are that they may rebound during the Christmas season. The housing market has come to a complete standstill with mortgage rates in the 16% range. Agriculture remains a bright spot in the region. Financial institutions are gloomy about their profits during 1980 and a general pessimism is expressed about economic prospects for 1981.
Retail sales volume is down both from last month and last year. While nondurable goods are selling at about last year's level, consumer durable sales are down substantially. Consumers appear to be postponing capital outlays. Very few credit card transactions are taking place since consumers are avoiding paying the high interest charges and because of the purported change in attitude towards the use of credit. Most retailers are taking a wait-and-see attitude before judging the magnitude of Christmas sales. Some fear the concern over economic conditions may put a damper on initially brisk sales activity. Automobile sales, which had been rebounding somewhat in October and early November, have been drastically reduced because of recent increases in interest rates.
The high cost of borrowing has also hurt the housing market. With mortgage rates in the range of 16%, housing activity has come to a complete standstill. The cushion of prearranged financing that held up through October has been exhausted. Potential home buyers are finding it difficult to qualify for financing. Banks and savings and loan institutions are reluctant to make mortgage loans at any rate. Expectations for the housing industry are grim since a greater slowdown in construction activity is forecasted for December.
Interest rate volatility is of major concern throughout the district. Respondents have universally indicated that the great swings in interest rates have made doing business much more difficult. Developing forecasts and planning strategies is virtually impossible because of the uncertain economy. The implementation of effective asset and liability management is essential. Businesses are also more cautious. Loan demand is down and businesses are reluctant to borrow because of the unpredictability of interest rates. As a result, businesses are delaying capital expenditures and are cutting inventories. The borrowing that is being done is short- term.
Agricultural prospects remain bright throughout the region. Most farmers are reporting large harvests and good prices. Cattle sales are expected to be well above last year's levels and ranchers are expecting adequate profits. Mixed feelings were expressed over what effect the recent increases in price supports will have on dairy farmers. Some fear that the price increase will be offset by a substantial decrease in consumption. The lumber industry remains depressed and additional layoffs are occurring.
Financial institutions are reporting that high interest costs are pushing profits down significantly. Financial institutions increasingly are unwilling to make long-term, fixed-rate loans. Loan losses and delinquencies are high. No widespread outflow of deposits has occurred yet. However, higher interest rates prompt concern about this possibility. Uneasiness over the impact of NOW accounts was also indicated. Financial innovations and regulatory changes are spurring greater competition for funds, complicating portfolio management. Some optimism was expressed that housing could be made more available as savings and loan institutions make greater use of equity sharing as a means of financing.
Expectations are pessimistic for 1981. It is feared that the rise in interest rates will choke the recovery and lead to very slow growth in real GNP next year. Energy and food prices are expected to skyrocket and play a significant role in increasing inflation. Both wage-rate increases and unemployment are expected to be high in the coming year.