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San Francisco: September 1981

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Beige Book Report: San Francisco

September 30, 1981

Respondents in the Twelfth District report further weakness in the regional economy and express less optimism that significant improvement will occur before mid-1982. Consumer spending is slowing, except for automobiles, leading to an unwanted buildup of inventory. Unemployment has been falling in most District states, but because of a decline in the labor force rather than growth in jobs. In fact, weakness is developing in certain key industries—such as aerospace—where employment had been stable. District homebuilding is in the doldrums, and sales and permit activity point to a further decline. Agricultural prices have been dropping, partly due to slow overseas demand. Commercial loan demand is increasing, but because of business cash flow problems rather than improved conditions. Mortgage lending activity at financial institutions is virtually nonexistent, with rates for conventional loans now as high as 19 percent. Savings and loan associations continue to experience a sharp decline in deposits, but it is unknown whether this movement is being offset by a shift to retail repurchase agreements.

Consumer Spending
Respondents report a further slowdown in retail sales, except for new automobiles which have been bolstered by dealer rebates and internal discount-rate financing by manufacturers. Sales of expensive durable goods, such as furniture and appliances, are said to be especially slow and to be running below year-ago levels in real terms. In some areas, even retail food sales are reported to be slowing. Particularly disturbing to retailers is the fact that the slowdown in volume—except for autos—is occurring even with price discounting. Reduced final demand is resulting in an unwanted buildup of inventory which could lead to further cutbacks in production as retailers try to hold down the cost of inventory financing by cutting back purchases.

Capital Spending
Respondents report that manufacturers have sharply scaled down their capital spending programs for 1981 and 1982 relative to plans formulated early in the year. These cutbacks have occurred in response to record-high interest rates, declining profits and reduced operating rates experienced thus far this year. Allowing for inflation and cutbacks in planned expansion, it now appears that most firms will experience little or no growth in real capital outlays in 1981. Even with the incentives in the Administration's tax program, respondents express little optimism that capital outlays in their region will rise significantly in real terms in 1982, unless interest rates drop sharply.

Employment
Unemployment rates throughout the region have been declining recently. But in many states, improvement has come from a drop in persons seeking work rather than growth in jobs. In the Pacific Northwest states—where unemployment rates still range from 9 to 1.1 percent because of the heavy dependence of the forest products industry on national homebuilding activity—respondents speculate that discouraged workers are leaving the area. Throughout the District, further layoffs are reported in the construction-related industries where employment already is severely depressed. Aerospace industry employment is beginning to weaken because of a further slowdown in commercial orders for electronic equipment and aircraft and an erosion in defense order backlogs due to delays in the Administration's new defense program.

Real Estate
Respondents express growing concern over the deepening slump in homebuilding and housing sales. Reports from all areas mention the distress being experienced by builders, realtors and material suppliers. Homes are not moving, despite reductions in prices. Mortgage loan demand at financial institutions is widely described as "dead." With the exception of a continuing boom in office building, nonresidential construction also is reported to be slowing.

Agriculture
Conditions in the Twelfth District agricultural sector appear to be less favorable than last month. Although crop production is generally reported to be good to excellent, prices for wheat, cotton, nuts and certain fruits and vegetables have been declining. Declining export demand, resulting from weakness in overseas economies and the strength of the dollar, has been responsible for the erosion in prices for some products. In the case of fruits and vegetables, fears about possible medfly infestation have caused buyers both here and abroad to be wary of California products.

Financial Institutions
Bankers report a strong increase in short-term business loan demand to support slow inventory turnover and aging accounts receivable. Loan demand for capital spending purposes has been decreasing, however, due to unused manufacturing capacity. Mortgage lending has come to a virtual halt, apparently not so much as a result of a tack of available funds, but rather the unwillingness of potential home buyers to borrow at current high mortgage rates. In California, savings and loan associations are asking 1.9 percent interest on fixed rate, 30-year mortgages on single-family residences and 17.75 percent on variable rate loans. Regional S&L's continue to experience a decline in deposits, but it is unknown to what extent this movement reflects a shift to retail repurchase agreements at the same institutions.