Beige Book Report: San Francisco
May 8, 1984
The Twelfth District economy appears to be growing at a slower rate than earlier this year but still to be outperforming the nation. Consumer spending strengthened in April, with rising interest rates reported to have had no dampening effect or durable goods sales. Western homebuilding activity has slowed since January, but remains far stronger relative to a year ago than nationally. Nonresidential construction activity continues to pick up, but there is some concern that vacancy rates in office and commercial buildings are rising. In the manufacturing sector, employment and output generally continue to grow but at a slower rate, partly due to the effects of the housing slowdown on such industries as lumber and the near full capacity operations reached in a few industries such as aluminum and paper. In California, agricultural crop growing and demand conditions generally are considerably better than a year ago, but wheat farmers in the Pacific Northwest are experiencing another difficult year. Loan demand at Twelfth District banks has continued at a strong pace despite higher interest rates.
Consumer Spending
Consumer spending appears to have increased more than seasonally
during April. Major department stores in Southern California, for
example, experienced an average 11 percent year-to-year gain in
sales during the first half of April compared with a 10 percent rate
of growth for all of March. In other Western states, sales also
increased, although the year-to-year gain was not as large. Sales of
apparel have been especially strong—up 25 percent at Southern
California department stores. But furniture, appliances and other
durable goods also are selling well and have not been adversely
affected by higher interest rates. Auto dealerships have been
experiencing much larger sales gains than department stores, even in
rural areas, and sales would be even higher were it not for
shortages of some larger-size vehicles. Auto financing charges to
consumers have risen only slightly due to competition created by
captive automobile financing companies. Except for autos, retail
inventories are reported to be somewhat heavy.
Manufacturing and Mining
Manufacturing employment continues to expand among a wide spectrum
of industries but at a slower rate overall than during the fourth
quarter. The most rapid gains continue to occur in the electronic
equipment and missiles and apace vehicles industries located in
California, Oregon, Arizona and Utah. Electronic firms have been
benefiting not only from rising defense and consumer demand but
business capital spending to enhance efficiency. Other capital goods
industries adding to their payrolls include nonelectrical machinery,
trucks and aircraft. In Washington, the nation's leading
manufacturer of commercial transport planes has been adding workers
since October but recently reduced its sales forecast for the 1985-
87 period. The Pacific Northwest lumber industry has been
experiencing a decline in orders and prices recently due to the
slowdown in national homebuilding. Two other Pacific Northwest
industries—aluminum and paper—are reported to be operating at
near full capacity, as is the California semiconductor industry.
Apart from these industries, the manufacturing sector throughout the
West generally still has ample unused production potential. After a
period of stability in payrolls, the copper and coal industries have
been laying off workers.
Construction and Real Estate
Homebuilding activity in the West has slowed since January in
response to the rise in mortgage interest rates. But as of March,
Western starts still remained 22 percent higher than a year earlier
compared with only a 3 percent year-to-year gain nationally. Housing
sales remained strong through March, but are reported to have
dropped 10-20 percent in April. This slowdown in sales, combined
with the large number of new homes recently completed, has resulted
in an increase in the inventory of unsold homes which suggests that
Western housing starts could fall in the next few months.
Respondents point to several factors which indicate that any such
decline could be moderate however. These factors include the rapid
increase expected in personal income in the West, the increased
public acceptance of adjustable rate mortgage packages—which
offer initial rates as much as 3 percentage points below
conventional fixed rate mortgages—and the increased offerings of
"buy-down" programs by builders. While respondents report a sharp
increase in nonresidential construction activity, they express
concern that the supply of new office and commercial space is
already beginning to outstrip demand. Firms continue to be cautious
about investing in new industrial structures, except for electronic
equipment manufacturers, especially semiconductor firms.
Agriculture
Agricultural conditions and prospects vary among the District
states. In California, crop conditions generally are considerably
more favorable than a year ago. Prices for most fruit and vegetable
crops produced in the state are up sharply from those of a year ago,
partly as a result of the winter freeze in Florida and Texas.
Planting and growing conditions are far better due to improved
weather. For example, planting of cotton is in full swing under
excellent weather conditions. Tree crops are budding early,
suggesting that yields of tree fruits and grapes will be moderate
and prices higher. In the Pacific Northwest, farmers are
experiencing another difficult year however. In Idaho, over 50
percent of last year's wheat crop is in storage. Prices for the Fall
wheat crop are expected to be only slightly above the break-even
point for most farmers in Washington and Idaho. Farm property values
are declining in the Pacific Northwest and a few scattered areas of
California. Bankers estimate that around 5-7 percent of California's
farmers are in extreme financial difficulty but that the percentage
is considerably higher elsewhere in the District.
Financial Institutions
Rising interest rates over the last two months have been reflected
in loan rates, but have not yet had a significant impact on loan
demand in the Twelfth District. Commercial loan rates have shown the
largest increase because they float in accordance with market rates.
Consumer loan rates at the major banks in the region generally have
risen by a smaller amount—25 to 100 basis points on most fixed-
rate loan products. Qualification standards, and other loan pricing
terms at most institutions, generally have remained unchanged. The
increase in rates has had mixed effects on loan demand among
institutions. In some cases, the strengthening economy has overcome
rising rates; other institutions report weaker loan demand. For the
District as a whole, large banks continue to report rapid growth in
commercial and consumer loans, and moderate growth in mortgage
lending. Banks anticipate continued strength in demand for
commercial loans, especially as borrowers accelerate their takedowns
of the large loan commitments used to finance merger activity.
However, institutions are concerned that further interest rate
pressure could begin to have a significant dampening impact on real
estate loan demand.