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.