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Beige Book Report: San Francisco

June 23, 1982

The preponderance of evidence suggests that the Twelfth District economic recession still has not ended. Consumer spending picked up in May and early June at both department stores and new car dealerships. Homebuilding also showed welcome improvement. But the large inventory of unsold homes—aggravated by the growing number of foreclosuressuggests that the homebuilding recovery may not be sustained. Meanwhile, commercial construction is slowing. In the manufacturing and mining sectors, a number of industries are undergoing a new wave of production cutbacks. In the agricultural sector, crop and livestock prices have increased recently, but net farm income still is expected to be down again in 1982. At Twelfth District banks, business borrowing has been increasing in June due to corporate cash flow problems, and bankers are seriously concerned over the growing number of nonperforming loans.

Consumer Spending
Respondents report a pickup in retail sales in May and early June. This improvement is noted for both department stores and automobile dealerships selling new cars. Sales of used cars, on the other hand, are reported to be slowing, perhaps reflecting consumer willingness to make more expensive new car purchases. Even furniture sales are reported to have improved modestly. Department stores have had to engage in heavy promotional efforts and sharp price discounting to bolster sales, however, and profit margins are reported to be extremely slim. Moreover, although inventories have been reduced, stocks are still reported to be higher than desired and retailers are being very cautious about placing orders for replacement and new-season merchandise. Even large supermarket chains are reported to be engaging in food "price wars," another indication of the highly competitive price environment existent throughout the consumer sector.

Manufacturing and Mining
Orders and prices in many basic Twelfth District manufacturing and mining industries have continued to decline in recent weeks, forcing further production cutbacks and layoffs. Especially hard hit have been the mining and primary metals industries—such as aluminum, steel, copper and silver—where prices have dropped to new recession lows. The copper and silver industries in Arizona, Utah and Idaho are estimated to have cut mine production to only about 50 percent of capacity. while employment in the lumber segment of the forest products industry has stabilized, the paper industry continues to cut back production. In both California and Washington, the aerospace equipment manufacturing industry has continued to register further overall declines in employment as growth in defense-related payrolls has been insufficient to offset continued layoffs in commercial aircraft and electronic equipment programs. The Boeing Company in Seattle has experienced a new wave of order cancellations from domestic and foreign airlines and still further cancellations are threatened. If those cancellations materialize, another 15,000 aerospace workers could be laid off in that state by year-end. On a favorable note, the recent strengthening of world oil prices is expected to arrest any further cutbacks in such energy programs as oil drilling and oil shale development.

Construction and Real Estate
Homebuilding in the Twelfth District finally appears to be picking up. But regional housing starts had dropped to a post-World War II low in April, and residential construction remains extremely depressed. Moreover, sales of new and existing homes also reached a post-World War II low in April, and respondents report no subsequent pickup. On the contrary, they describe the residential sales market as "completely dead." They also report a sharp increase in foreclosures. Until the large inventory of unsold homes is reduced, respondents are doubtful that a significant homebuilding recovery can be sustained. Meanwhile, developers of commercial properties are now experiencing the same kind of serious financial distress experienced earlier by home builders. Developers are finding it increasingly difficult to sell or rent new projects, given rising vacancy rates and the growing unwillingness of pension funds and insurance companies to invest in commercial property.

Agriculture
Prices for such important Twelfth District agricultural crops and livestock products as citrus fruit, apples, hay, rice, potatoes and cattle have risen recently. But despite this increase—resulting in part from some pickup in export demand—agricultural prices generally continue to lag behind the level of a year ago, while farm input costs are up sharply. As a result, the agriculture industry expects to experience its third consecutive annual decline in net income in 1982. Bankers report that numerous farmers, who already are heavily in debt, are finding it increasingly difficult to obtain additional financing. Adding to their cash flow problems, equity in agricultural real estate—which usually supports agricultural production financing—has not been appreciating owing to the high cost of financing and poor commodity prices. As a result, a growing number of farm properties are for sale at distressed prices.

Financial Institutions
Data for the first two weeks of June indicate that bank credit growth in the Twelfth District has picked up substantially relative to growth reported in April and May. Most of this growth can be attributed to a resumption in business loan demand, with only very modest growth in consumer and real estate lending. Banks report strong business loan demand despite borrowers efforts to reduce reliance on debt by postponing and scaling back projects, reducing inventories and selling assets. Bankers appear very concerned about the level of nonperforming business loans, particularly to the construction, forest products and aerospace industries. They are reviewing new credits very carefully and are particularly cautious regarding repurchase transactions following the Drysdale default.