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Beige Book Report: San Francisco

December 15, 1982

The economy of the Twelfth District appears to have slipped more deeply into recession. Unemployment rates generally rose during November and the District as a whole posts a higher unemployment rate than the national average. Although declines in interest rates have spurred residential construction permit activity (substantially in some cases) the industry is operating at such levels that little absolute stimulus has been felt as a result. The lumber mills in the District are suffering from the combined impact of the continued reduced domestic and foreign demand, and costly timber cutting obligations. Retail sales have been disappointing thus far and conventionally strong industries—such as aerospace and electronics—are experiencing major layoffs. Motor car manufacturing is sagging under the announcement of further plant closures. Financial institutions in the region report deposit outflows or only weak deposit growth except in the high-yield money-market type accounts and loan demand has been flat.

Consumer spending
Reports from major department stores and other retailers indicate "disappointing" sales growth over last year, which was itself a weak year, although there is some early optimism about Christmas season activity. Several major Southern California department stores, when surveyed, indicated that nominal sales growth was up only about 7 percent, barely matching the inflation rate. Penny's and Sears report sales volumes below that of a year ago. In the restaurant industry, the picture is much the same with nominal sales growth of about 6 percent; even that modest growth is attributed to stable food costs and no increase in the minimum wage allowing restaurants to induce continued patronage with relatively low prices, volume is flat for one California retail grocery chain and net income is below the level of a year earlier. Only tourism in Hawaii and Oregon are consistently reported as bright spots in the consumer spending picture. Hawaii expects to top its all- time tourism volume record this year, helping to make the Hawaiian unemployment rate one of the lowest in the District and considerably below the national average.

Manufacturing and mining
There are few good reports concerning the condition of the District's manufacturing and mining enterprises. Aerospace and electronics report falling orders and reduced margins on foreign sales because of the unusual strength of the dollar. Boeing's new equipment sales, for example, are at the lowest annualized volume in 20 years. Manufacturers of electronic equipment are experiencing reduced domestic and foreign sales; so many retailers returned merchandise to Atari, Inc., for example, that the price of its stock experienced an unprecedented plunge in early December. The mining of the region's copper, silver and molybdenum remain at low levels of activity, with 10,000 of Arizona's mining employees out of work in copper mines alone. Depressed world oil and gas prices have also affected the economies of Alaska, California and the intermountain states, although Utah's relatively more diversified economy has allowed it to experience "flat" growth rather than absolute declines in overall activity. Although declining interest rates have helped some corporations' profit positions, many remain "locked in" to long term financing agreements at much higher rates, causing a spotty pattern of profit margin changes. Automobile manufacturing in the District was dealt another blow with Ford's announcement that it would close its Northern California assembly plant. Car sales, however, have picked up in the District, primarily in response to the special interest rate concessions offered by General Motors and Ford.

Construction and real estate
Lower interest rates have undoubtedly provided some stimulus to the housing industry; there have been surges in activity reported throughout the District, with permits increasing as much as 80 percent in some parts of Utah. Homes are selling more rapidly in the low and high-priced ranges than in the medium-price range; the base level of activity is so low, however, that recent upsurges can hardly be called a recovery. Commercial real estate is also beginning to suffer as the traditional overbuilding cycle takes hold and demand for office space weakens. District architects report the lowest levels of backorders in years, an ominous leading indicator for future activity.

Agriculture
Although early rains damaged tomato and wine and raisin grape crops in California, in general the harvest season yielded bumper crops, leading to depressed prices and farm incomes. In addition, there is a growing move toward protectionism among the District's farmers who feel that certain foreign products—particularly cotton and raisins—enjoy the benefit of government subsidies and are hurting domestic producers. The problem is amplified by the relative weakness of foreign currencies. The timber products industry is suffering a three-pronged effect of weak domestic demand (with most mills operating at less than 40 percent capacity), weakened European and Asian demand for stumpage, and costly public timber harvesting obligations. It is estimated that Northwest timber producers will suffer a $2 billion loss if they are required to comply with earlier contracts to harvest 10 billion board feet from public lands during this period of weak demand.

Financial institutions
District financial institutions report flat loan demand and either flat deposit in-flows or continued outflows; the latter is particularly true of the beleaguered savings and loan industry. Preliminary evidence from October indicates that the outflow from maturing All Savers Certificates may be in the $6 to $8 billion range for savings and loan associations. Roughly 25-45 associations are disappearing through consolidation each month. Falling interest rates have improved spreads for some associations, and some will report second-half profits. However, much of the profits are due to sales of loans or trading profits and the picture still remains bleak. The high-yielding money-market type accounts are the only major source of funds inflows to banks and savings and loan associations. The largest Western banks report continued deterioration in the financial positions of a sizable number of existing commercial loan customers, as well as in the condition on a major portion of applicants for new business loans. Until firms have seen a significant improvement in the business fortunes and have had time to resolve their current financial difficulties, near-term improvement in business loan demand seems most unlikely.