Beige Book Report: San Francisco
March 23, 1982
The Twelfth District economy has slipped deeper into recession since the last report. Consumer spending has remained at the slow post-Christmas holiday level reached in January and is running below the year-ago level in real terms. In the manufacturing and mining industries, further cutbacks and layoffs are occurring in a number of industries, although the pace of the overall decline appears to be decelerating. Homebuilding activity has dropped recently, in contrast to the national pattern, and nonresidential construction also is slowing. Agricultural commodity prices have risen slightly during the past month but remain well below the level of a year ago. Respondents expect little or no improvement in net farm income in 1982, following 1981's decline. Bank credit at Twelfth District banks rose sharply in February, but as a result of weakness rather than strength in the regional economy.
Consumer Spending
Respondents report little change in retail sales from the slow post-Christmas holiday pace reached in January. Spending remains weak,
running below the level of a year ago in real terms. Consumers
continue to exhibit cautious spending behavior, staying away from
costly durable goods such as furniture and appliances and confining
their purchases to apparel and other necessities. Large department
stores are doing better than smaller retail outlets which are
reported to be going out of business in increasing number,
especially in rural communities. While most retail outlets are no
longer liquidating excess inventory, they are reported to be holding
stocks at "bare-bone" levels, buying much less spring and summer
merchandise than a year ago. This conservative inventory pattern
reflects not only high interest rates but their belief that consumer
spending probably will remain sluggish for the next few months.
Automobile sales did pick up somewhat in February, in response to
the domestic car rebate program, but still remained depressed
relative to a year ago. Moreover, respondents are concerned that
these purchases are being "borrowed" from subsequent periods and
that auto sales will drop sharply when the rebates are eliminated.
Mining and Manufacturing
Respondents report further cutbacks in production and employment,
but at a decelerating rate. Employment in the lumber and mining
industries has stabilized at a very depressed level, with these
industries operating at about 60 percent of capacity or less. But
layoffs continue in the construction, commercial aircraft, aluminum
and automobile industries. For example, the Boeing Company in
Seattle recently announced plans to layoff as many as 5,000 workers
this year because of slow demand for commercial aircraft by foreign
and domestic airlines. General Motors Corporation recently closed
its assembly plant at Fremont, California, and will shut down its
plant at South Gate, California on April 1. These closures will
layoff 2,500 and 500 workers at those respective locations and will
have ripple effects on other industries. While rising defense
spending is having some positive impact on regional employment, most
of the stimulus is expected in 1983-84 when programs such as the B-l
bomber move into the production phase.
Real Estate
The Twelfth District has failed to experience the pickup in either
new home sales or homebuilding reported elsewhere. On the contrary,
sales of new homes remain so depressed that builders are still
trying to dispose of unsold inventory. As a result, homebuilding
activity has dropped to a new post-World War II low. Buyers are
purchasing only when essential and only when extraordinary financing
is provided by sellers. The slump in sales is eroding selling prices
for both new and older single-family homes and condominiums, causing
prices to drop below year-ago levels in real terms. Moreover,
realized prices are lower than selling prices because of seller-financed transactions at below market interest rates. Distress among builders, brokers and property owners is especially great in areas
of higher than average unemployment. Nonresidential construction
activity also has been dropping recently as business firms have
scaled back capital spending programs. Even the boom in office
building construction has subsided as a glut of space has begun to
appear in metropolitan areas.
Agriculture
Twelfth District farmers and ranchers experienced a decline in both
gross and net farm income in 1981 as bumper crops combined with
lagging demand to reduce commodity prices. Prices for a large number
of commodities have risen recently but remain well below the level
of a year ago. Thus, unless farmers produce significantly less in
1982 than in 1981, little or no improvement in farm income is likely
this year. So far, agricultural sources are pessimistic that farmers
will carry out that production cutback. Although the Department of
Agriculture has reinstated several set-aside programs to reduce
planted acreage, Twelfth District farmers generally are not expected
to take advantage of those programs. Meanwhile, farmers and ranchers
already are heavily in debt and finding it increasingly difficult to
meet loan payments.
Financial Institutions
Bank credit at Twelfth District banks rose sharply in February as a
result of a strong increase in business loans. However, as in recent
months, the increase appeared to stem from the economy's weakness
rather than from strength. Businesses are borrowing to finance
involuntary inventory accumulation and to meet short-term working
capital needs. Bankers also report an across-the-board deterioration
in the financial condition of many prospective business borrowers.
In other areas, real estate loans continued to expand at a sluggish
pace. Demand for new mortgage loans continued to be weak, with a
slowdown in liquidation of old loans helping to account for the
increase. Consumer loans dropped for the second consecutive month.
Loans for automobiles and consumer durables were especially weak as
rising unemployment caused further weakness in household borrowing.
Bankers also report an upward drift in consumer loan delinquency
rates and personal bankruptcies.