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Beige Book Report: San Francisco

November 16, 1982

The Twelfth District economy remains entrenched in recession. Consumer spending is not leading the recovery, despite the tax cut, while unemployment is rising. Residential construction is still depressed, and non-residential construction is now slowing down in many areas of the District. The lumber industry continues to suffer from mill closures, layoffs, low prices, and foreign competition. Metal prices are still too low to reopen any closed mines. In agriculture, low crop prices are contributing to low farm incomes, and unseasonable rains recently caused large losses for some California crops. Depository institutions appear to be gaining funds with new types of deposit accounts, but the large amount of funds coming due in balloon-payment mortgages is a major concern among financial institutions. A survey of Twelfth District Directors indicates that unemployment is almost universally expected to increase further on both a national and regional basis, but the recent rise in bond and stock prices are seen by some as an optimistic sign.

Consumer Spending
Continuing high levels of unemployment appear to be holding back any recovery in consumer spending. Despite the recent tax cut, retail sales continued to be weak in August and September, as retail stores failed to benefit from back-to-school buying. Weak sales in early October are threatening even the holiday season's upturn. In many parts of the District, auto sales continue to be slow, despite a wide variety of sales pitches. With high consumer loan rates, consumer credit is not increasing in southern California or Utah. One bright spot, tourism in Oregon, is estimated to be up 10 percent this year over last year.

Manufacturing and Mining
Manufacturing and mining continue to be depressed in the Twelfth District. In the lumber industry, at least four more major plants and mills have closed recently in Oregon and Washington, and more are expected to close before the end of the year. In Idaho, the wood products industry is still operating at a very low level of activity. Prices of some major lumber items are now half what they were in 1979. As a consequence, prices on federal timber contracts made several years ago are well above market. To avoid defaults and further curtailment of activity, the canceling of some contracts has been proposed. It is believed that wood pulp and paper producers are losing 20-25 percent of their business to foreign imports. While silver prices are up from a recent low, they are not high enough or firm enough to reopen any of the closed mining operations in Idaho. Unemployment in the mining areas is very high, and many workers face the expiration of their benefits in early 1983. The copper and steel industries existence in Utah are threatened by continued low prices for these products. In the Seattle area, Boeing continues to eliminate several hundred jobs each month; employment at Boeing is expected to fall from 85,000 last year to 70,000 by the end of this year.

Construction and Real Estate
Late summer brought no signs of recovery for the housing industry, though recent declines in mortgage rates have been cause for some optimism. By the end of 1982, the number of new residential permits issued in Utah will have fallen by 70 percent from the 1977 all-time high, making this housing recession the longest and most severe on record. New permits in Oregon so far this year are at less than a tenth of 1979 levels. The nonresidential construction picture is mixed. In Oregon, this activity dropped 30 percent in August from July. In Los Angeles, nonresidential construction has slowed down; some projects have been canceled, including a few that were underway, because long-term financing could not be found. In Washington, however, commercial construction remains strong, although office vacancies are rising; and, in Utah, nonresidential construction was up 153 percent in August from a year ago. Signs that inflationary expectations are coming down are to be found in the low bids for various large highway construction projects in Washington State; these bids were half the previously estimated cost.

Agriculture
Cold and wet weather in late August and September has caused some dramatic crop losses in California, which have been estimated to amount to between $150 million and $300 million. Raisins, wine grapes, and almonds all suffered losses. Low prices and rain have combined to cut farmers' income from this year's harvest of alfalfa, tomatoes, and lima beans. Low prices and weak demand continue to keep farm income low, and are threatening farmers in some areas with the loss of their farms.

Financial Institutions
The drop in interest rates appears to have generated demand for restructuring debt, rather than much new investment. Increased inquiries about home loans may signal a real estate market improvement, but may also result from borrowers' desire to refinance balloon payment loans amounting to an estimated several billion dollars. The new variable rate account is attracting funds to depository institutions, and there has been some recovery in core deposits recently. Delinquencies and bankruptcies are not causing noticeable problems, though some financial institutions are having to take over real estate. A survey of Twelfth District Directors indicates that recent declines in interest rates have not reduced the number of problem loans and a substantial reduction will not occur until the economy improves.