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San Francisco: August 1981

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Beige Book Report: San Francisco

August 11, 1981

Reports from the Twelfth District indicate that economic activity is weakening. Respondents report little recent change in consumer spending, but volume remains below the level of a year ago. Consumers are especially hesitant to buy large items. Unemployment is rising, especially in construction-related industries. District homebuilding activity has slowed further recently, and sales and permit activity point to still further declines. Agriculture continues strong, but exports are beginning to slow because of the rising foreign exchange value of the dollar. Exports of aircraft and forest products also are being curtailed by currency developments. Commercial loan demand is increasing moderately, but because of business cash flow problems rather than improved conditions. Mortgage lending activity at financial institutions is nearly non- existent, with rates as high as 18 percent. Financial institutions are experiencing increasingly severe earnings pressure. Savings and loan associations are especially hard hit as a result of a continued record outflow of funds and the heavy burden of low-yield mortgage portfolios.

Consumer Spending
Respondents report little change in retail sales from the slow pace reported last month. Sales are up from year-ago levels in dollar terms but down in volume. Sales of expensive durable goods, such as appliances and domestically-produced automobiles, are said to be especially sluggish. Dealer inventories of automobiles are excessive. Retail stores throughout the area are reported to be discounting prices and advertising heavily to attract customers. Still, their inventories also are reported to be building.

Employment
Respondents throughout the District report that unemployment has been rising recently except for states where energy developments are helping to boost payrolls. Further layoffs are reported in the construction-related industries where employment already is severely depressed. Significant improvement is not expected until interest rates fall substantially. The Pacific Northwest continues to be especially hard hit because of the heavy dependence of the forest products industry on national homebuilding activity. Aerospace industry employment has remained fairly stable in recent months as rising defense business has helped offset a slowdown in orders for commercial aircraft and electronic equipment.

Real Estate
Respondents report a further slowdown in homebuilding activity and housing sales, with areas that previously were holding up rather well now showing weakness. Developers and other sellers are lowering prices in an effort to dispose of property. Mortgage loan demand remains very slow, with few potential buyers willing or able to pay rates as high as 18 percent. There is concern that creative financing—especially "balloon payments"—could cause a wave of foreclosures in two or three years when refinancing is required. With the exception of a continuing boom in office building, nonresidential construction appears to be slowing.

Agriculture
Crop production in the Twelfth District is generally reported as good to excellent. Bumper crops are reported for cotton, wheat, potatoes and almonds. Financial losses due to the Mediterranean fruit fly have not been great to date but could become considerable if other states renew their quarantine on California fruits and vegetables. Infestation to date has not spread to major California producing regions, and aerial spraying appears to be working. Prices for some export products are weakening, not only because of abundant worldwide supplies, but the rising foreign exchange value of the dollar.

Foreign Trade
The rising foreign exchange value of the dollar is said to be having a significant depressing effect on Twelfth District exports. Aircraft, forest products and agricultural commodities are the product lines reported to be most seriously affected. Sales of aircraft to overseas customers are being lost to French manufacturers, pulp and paper to Swedish and Canadian producers and agricultural products—especially wheat—to Canadian and Australian exporters. In those product lines where losses of market shares are being reported, rising costs have prevented District producers from. lowering their prices sufficiently to remain competitive.

Financial Institutions
Bankers report a moderate increase in overall business loan demand and a shift in composition. Heavy increases are reported in the demand for working capital to support slow inventory turnover and aging accounts receivable. Loan demand for capital spending purposes has been decreasing however, because of substantial unused manufacturing capacity. Mortgage lending has been extremely slow, both because of the record outflow of funds from savings and loan associations and the unwillingness of potential home buyers to borrow at current high mortgage rates. Foreclosures and losses on consumer loans are reported to be increasing. Concern over the financial difficulties of S and L's is growing, and these institutions are pressing for legislation that would permit them to compete more effectively with mutual funds and reduce the earnings burden of low-yielding mortgage portfolios.