‹ Back to Archive Search

Beige Book Report: San Francisco

August 18, 1982

The Twelfth District economy slipped deeper into recession during the past month and further near-term weakness appears to be in prospect. Consumer spending declined in July at both department stores and new car dealerships, and reports for early August suggest no improvement. Homebuilding continues to pick up gradually, but from an extremely depressed level. Moreover, the large inventory of unsold homes and recent Supreme Court ruling permitting Federally- chartered S & L's to enforce the due-on-sale clause on outstanding mortgages suggest that any further recovery this year will be negligible. Meanwhile, commercial construction is slowing. In the manufacturing and mining sectors, a number of industries cut back production further in July and announced further curtailments for August to reduce excess inventory. In the agricultural sector, the relationship between farm costs and prices continues to deteriorate. At Twelfth District banks, real estate loans outstanding continue to grow, but for reasons related to hardship among builders and households rather than strength in construction activity.

Consumer Spending
The long-expected consumer led recovery does not appear to have materialized in the Twelfth District. Respondents report that retail sales dropped in July and barely exceeded the year-ago level in nominal terms. The decline was noted for both department stores and automobile dealerships selling new cars. In fact, car dealers reported July sales activity as the worse yet during this recession. In the face of rising unemployment, high interest rates and an uncertain future outlook, consumers still appear to be exhibiting extremely cautious spending behavior. A slow tourist season also is adversely affecting retail business. Meanwhile, retail profits are depressed, bankruptcies are rising, and managers are scaling back plans for purchasing fall merchandise. Even grocery store sales are reported to be sliding.

Manufacturing and Mining
Many basic Twelfth District manufacturing and mining industries cut back production and employment further in July. In the Pacific Northwest, the lumber industry sank deeper into depression as the renewed weakness in national housing starts further reduced orders and prices. The paper industry also experienced further weakness in orders, not only from domestic but foreign customers. The Boeing Company in Seattle continued to reduce its payrolls in response to order cancellations for commercial aircraft, also forcing further curtailments at Pacific Northwest aluminum plants. In the Intermountain states, cutbacks were especially severe in the copper industry where producers in Arizona and Utah reduced mine production to only about 55 percent of capacity. Efforts to arrest the worldwide accumulation of excess inventory have been unsuccessful due to rising foreign production and depressed demand from such industries as automobile manufacturing and construction. As a result, further curtailments are planned for August. In California—a state which traditionally outperforms the nation—the unemployment rate reached an all-time high of 10.5 percent in July. Particularly notable has been another recent wave of layoffs in the semiconductor industry which once again is facing excess inventory due to depressed business capital spending for such products as computers.

Construction and Real Estate
The slight improvement in Twelfth District homebuilding activity that began in the spring appears to be continuing. But residential construction activity in the region is still even more depressed relative to a year ago than activity nationally. Moreover, the recent pace of residential building permit activity virtually guarantees that any further improvement this year will be negligible. There are other factors that suggest this outcome. First, the inventory of new and old unsold homes has continued to rise. Second, a large proportion of sales in recent months has been through some form of creative financing, and the recent Supreme Court decision allowing Federally-chartered S&L's to enforce the due-on-sale clause will end the assumption of mortgages originally issued by those institutions. Meanwhile, nonresidential construction expenditures are slowing dramatically as a result of rising vacancy rates and cutbacks in private and public capital spending. Vacancy rates in office buildings and shopping centers are reported to be rising. For example, in San Francisco, about 10 percent of the city's first class office space is vacant.

Agriculture
Prices for important Twelfth District agricultural crops and livestock products have shown mixed patterns recently. Prices for fruits and vegetables generally have increased, while prices for cattle and grains have moved lower. But, in general, the relationship between farm prices and costs has continued to deteriorate, both relative to earlier months in 1982 and a year earlier. Moreover, the outlook for improvement in net income later this year is not favorable, given the bumper crops in prospect. Adding to the industry's problems, the rising foreign exchange value of the dollar and slowdown in overseas economies have been acting to reduce agricultural exports. Due to declining net income, the industry's demand for credit has been increasing substantially while its creditworthiness has been deteriorating.

Financial Institutions
July data show no significant change in total bankcredit from the month earlier. Real estate loans outstanding were the only major component to exhibit strength, although growth there was slower than a year ago. Growth in mortgage loans continues to reflect a lower rate of turnover of properties and consequent slower pace of repayments on outstanding loans, as well as the continued expansion of credit needs for commercial projects already in progress. Slow sales of new housing units and high long-term interest rates also are forcing builders to restructure existing debt and to turn increasingly to short-term bank borrowing. Residential loans outstanding also continue to grow because homeowners find home equity loans (seconds) attractive and because banks have been offering below-market financing on new homes to help move the excess inventory of builders to whom they have extended construction financing.