Beige Book Report: San Francisco
February 2, 1983
The economy of the Twelfth District remains depressed, with unemployment rates above the national average, but for the first time in several months there are a few signs of cautious optimism. Automobile and home sales are up, for example, and there are reports of increased retail sales activity. The overall picture remains bleak, however, with the region's major sectors still deeply depressed. Depository institutions are actively pursuing their newly acquired deposit-taking powers and aggressively promoting the accounts with above-market deposit rates and special bonuses. These developments have increased overall costs of funds by between 25 and 100 basis points according to a special survey by this Bank.
Consumer Spending
Retail sales appear to be picking up slightly in some areas, even
after accounting for inflation. In California's Central Valley, for
example, one sales report suggested a 9 percent increase over the
year, and in the Los Angeles area, sales in November, December, and
the first week of January were up 8, 7, and 13 percent respectively
over the year before. Retail sales of franchise operations are
generally reported to be up slightly or flat, and there are some
reports of active automobile sales. The tempo of retail activity
varies considerably, however, with the Pacific Northwest generally
reporting the most persistent weakness in consumer enthusiasm.
Manufacturing and Mining
The picture in this sector continues to be dominated by the
extremely weak lumber industry. Although lumber inventories have
declined with concomitant firming of lumber and plywood prices in
December, there has been no general surge in demand as would be
required to rescue an industry in deep recession. (The Oregon State
Homebuilders Association reported the lowest number of housing
starts in 1982 in their history.) Mining remains weak--particularly
copper and coal--but now that silver prices have gone above $11 an
ounce some of the mines in North Idaho are reopening. Aerospace
presents a mixed picture, with relatively strong reports from
Southern California, but with the continued weakness of Boeing's
commercial aircraft business retarding this activity in the state of
Washington. Despite offsetting growth in military-related
employment, observers expect Boeing employment to be down by a net
of 8,000 workers for 1983. The electronics industry in California
and the Pacific Northwest remains weakened by foreign competition
and disappointing domestic demand growth. Primary metals manufacture
and fabrication also continue to be weak; the recession in the
aluminum industry has been a major factor in the woes of the Pacific
Northwest.
Construction and Real Estate
Recent declines in mortgage interest rates have spurred increases in
construction in many parts of the District. In southern Idaho, for
example, residential starts in December were up 75 percent over
1981, and nonresidential construction valuation was up 78 percent
over the same period. The substantial increase in FRA mortgage
applications throughout the District supports the prospect of strong
recovery if rates stay down. In certain areas, however, an overhang
of unsold inventory has blunted the effect of recent mortgage rate
improvements. This is particularly true of Southern California
where, despite increased sales activity, residential construction
remains depressed and the inventory is dissipating slowly.
Agriculture
Generally, agriculture has been troubled by both weak prices and
weather-related crop damage. In Idaho, where agriculture is the
major economic activity, weak cattle prices and a frost-damaged
potato crop have caused widespread difficulty; in the latter case,
this is the reverse of the expectations earlier this year when a
bumper potato crop was anticipated. In California, cold and wet
weather damaged raisin grape and almond crops. The estimated loss is
between $150 and $300 million. Lettuce and fruit and nut tree
growers have benefited, though, as the weather has permitted delayed
harvesting of desert lettuce crops and the cold will increase bud-
setting on the fruit and nut trees.
Financial Institutions
The major developments in the District's financial environment have
been the introduction of the Money Market Deposit Accounts (MMDAs)
and the so-called "Super-NOW" accounts. A special survey by this
Reserve Bank finds that the MMDA has been marketed very aggressively
with above-market rates and onetime bonuses. Estimates of the amount
of "new" money attracted to these instruments varies from 15 percent
to almost 50 percent, while estimates of the effect on the overall
cost of funds varies from 25 basis points to more than 100 basis
points. All respondents agreed, however, that by comparison with the
MMDA, the "Super-NOW" account has been much less popular. Mortgage
rates in the District have fallen considerably and are now in the
12.75 to 13.50 percent range, with the standard fixed-rate 30-year
mortgage by far the most popular instrument in most areas.