Beige Book Report: San Francisco
December 16, 1981
The Twelfth District economy appears to have weakened further in the last month. Retailers report stability in sales in November, following October's decline. But early indications point to a disappointing Christmas season, with December sales just about matching the year-earlier level and thus failing to keep up with inflation. Serious deterioration is evident in the manufacturing and mining sectors, where production cutbacks and layoffs are becoming deeper and more widespread. Moreover, growing inventories point to further production cutbacks. Residential construction and home sales continue at extremely depressed levels with the recent decline in mortgage rates having no appreciable stimulating impact. Farmers are experiencing a further reduction in income as a result of a continuing decline in commodity prices. Commercial loan demand remains slow for capital spending purposes but has increased to finance excess inventory. Banks continue to suffer an outflow of deposits to higher-interest bearing market instruments. Sales of the All-Savers Certificate have dropped sharply after an initial flurry. These certificates have had little effect in bringing in new savings or reducing the cost of deposits.
Consumer Spending
Respondents generally describe retail sales in November as having
been "flat." After declining in October, sales in nominal terms in
November apparently just about matched the month-earlier pace.
Consumers are exhibiting an extremely cautious spending attitude,
and department stores and other retail outlets are having to engage
in intense pre-Christmas promotional campaigns—including
widespread price discounting—to attract business. Partly as a
result of discounting, most merchants expect December retail sales
in nominal terms to just about equal last year's level, representing
a decline in real expenditures. Faced with rising costs and
markdowns, retailers complain of a squeeze on profit margins. Adding
to their financial problems, collections are slowing.
Manufacturing and Mining
Respondents report serious further deterioration in industrial
production and employment. Depressed industries—such as lumber,
construction and metals—continue to experience cutbacks, while
weakness also is spreading to other industries that had been
expanding. Alaska—benefiting from energy development—apparently
is the only Twelfth District state to still be experiencing growth
of payrolls.
In the Western lumber and metal industries, further price weakness is forcing additional closures and curtailments. Western lumber production currently is running about 45 percent below the 1978 peak and a further drop in output is expected. Copper producers in Arizona and Utah recently announced further production cutbacks. The Bunker Hill Company will permanently close its silver and zinc mining facilities in Idaho this month, laying off 2,000 workers. Kaiser Steel Corporation plans to phase out primary steel production at its Fontana, California, plant and to continue only fabricating operations.
Slow commercial orders are forcing further layoffs in the aerospace equipment manufacturing industry. Lockheed Aircraft Corporation plans to discontinue production of its L-1011 jet transport. Orders had slowed to a trickle due to the poor financial performance of the nations s airlines. Semiconductor firms in California have scheduled extended shutdowns during the Christmas holiday period to reduce excess inventories. In fact, excess inventory is becoming a more pervasive problem in the manufacturing sector, pointing to a further broad-based production decline.
Real Estate
Respondents report little change in homebuilding activity or home
sales recently, with both remaining at extremely depressed levels.
The recent decline in conventional mortgage rates has had no
appreciable effect in spurring home sales, and bankers and builders
do not expect a significant upturn in housing activity until rates
drop to around 13-14 percent. Nonresidential construction is
reported to be slowing, although activity remains above the level of
a year ago.
Agriculture
Twelfth District farmers and ranchers are experiencing growing
financial problems as a result of continued weakness in farm and
livestock prices. One respondent reported that cattle prices have
now dropped below production costs for most ranchers. Agricultural
production is up from year-ago levels, but bountiful supplies and
weak export demand continue to depress prices for a wide range of
products. The combination of falling prices and rising production
costs is severely squeezing farm incomes.
Financial Institutions
Business loan demand remains slow except for a pickup in short-term
credit requirements to finance inventory. The recent decline in
domestic interest rates has had no appreciable effect in spurring
borrowing for capital spending purposes. Rather, firms are reported
to be turning increasingly to foreign sources for funding. Consumer
and mortgage borrowing from banks continue to be extremely slow;
declines in mortgage rates thus far have been insufficient to
rekindle consumer enthusiasm. The money market mutual funds continue
to siphon off low-cost core deposits at banks and S&Ls and these
institutions continue to rely more heavily on consumer-type
certificates and other more expensive funds. Sales of the All-Savers
Certificate were strong in October, but fell sharply in November.
These certificates apparently have had little effect in bringing in
new savings or reducing the cost of deposits.