Beige Book Report: San Francisco
June 30, 1981
The consensus in the Twelfth District is for a weakening in the economy. Most are forecasting a continued decline in consumer spending. Consumers are especially hesitant to buy large items. The unemployment and inflation picture in the region is following the national trend. Unemployment rates have edged upward, while the inflation rate has slowed. With housing, energy, and food prices leading the way, very optimistic short-run inflation expectations are being expressed. Little activity is occurring in the housing market. Mortgage rates are still high, up to 18 percent, and consumers are hesitant to obtain adjustable rate mortgages. Agriculture continues strong and many areas are reporting good harvests. Financial institutions are increasingly troubled by the outflow of deposits to money market funds. It is felt that the current regulations are inequitable and that the restrictions need to be immediately loosened so that banks and thrifts can better compete with other institutions offering financial services.
Consumer Spending
Indications were given to suggest a rather widespread and
substantial weakening in consumer spending. Sales of durable goods,
especially automobiles and appliances, are said to be extremely
sluggish. It was suggested that with the ending of the rebate
programs, car sales will continue to be slow. In many areas,
department stores are engaging in large promotional campaigns in an
attempt to attract buyers. However, it was felt that consumers are
reluctant to spend due to fears over the weakening state of the
economy.
Employment
Most areas in the region are reporting a slight upswing in
unemployment. The construction-related industries are still in a
major recession. Little improvement is expected until interest rates
fall. The Pacific Northwest continues to be especially hard hit as
its economy is highly dependent on the forest products industry.
Employment in the electronics and computer industries continues to
benefit from increased demand. Plant expansions continue to create
new employment opportunities. Aerospace employment has leveled off
as orders, especially for older craft, have declined.
Real Estate
Little activity in the housing market is being reported. With
mortgage rates as high as 18 percent, few potential buyers are able
or willing to obtain mortgage loans. Home buyers are very reluctant
to obtain adjustable rate mortgages even though they are being
offered at lower interest rates than other mortgage instruments.
Commercial construction appears to be tailing off. Vacancy rates are
on the rise and builders are hesitant to engage in any new activity.
In some cases these rates have doubled from last year's level.
Prices
An optimistic outlook is being expressed over the short-run
inflation picture. Housing, energy, and food prices appear to be
significantly holding down inflation. With high interest rates
discouraging home buyers, housing prices appear to be leveling off.
The oil glut has helped to lower gasoline prices. Food prices have
also dropped slightly. It was indicated that consumers appear to be
staying away from high priced items and this, too, has helped to
keep prices down. However, most are dubious that the improved
inflation picture will remain past the summer. If the economy begins
to expand, prices, especially for raw materials, are expected to
accelerate.
Agriculture
Agricultural prospects remain bright. For the most part, recent
rains have eased concerns over a potential water shortage. The rains
delayed the cotton planting, but a good crop is projected. Despite a
freeze in the Pacific Northwest, the apple crop may be as large as
last year's record harvest. Wheat farmers are expecting high prices
for their product, and farmers in general are said to be in as good
a financial position as they have been in five years.
Financial Institutions
The outflow of funds from savings and loan associations is said to
be reaching record levels. This outflow is adversely affecting both
the profitability of these institutions and the availability of
funds for residential housing. Consumers are better informed and are
less willing to be satisfied with below market rates. There seems to
be an increased call for legislative action that would aid thrifts
and banks. Most desire an easing of restrictions so that these
institutions could compete on a more equal footing with money market
funds. Many argue that thrift institutions, with their aging
portfolios of mortgage loans, can be in serious trouble in the very
near term if interest rates do not go down and legislative action is
not taken. The FSLIC insurance reserves are deemed insufficient to
withstand the demands that are likely to be imposed. Banking
activity is relatively slow. Lending activity has slowed for both
commercial and consumer loans.