Beige Book Report: San Francisco
October 23, 1984
The Twelfth District economic expansion has cooled dramatically. In September and early October, retail sales at department stores and automobile dealerships are reported to have shown no significant improvement from August's reduced pace. Nonresidential construction activity is reaching boom proportions in key metropolitan areas. But the recent slight reduction in mortgage interest rates has been insufficient to prevent both the construction and sale of new homes from falling further. The strong U.S. dollar, and consequent increase in lower-priced foreign imports, is hurting such key Western industries as lumber and primary metals, reducing the overall growth of manufacturing employment to a crawl. Prices for important Western agricultural products continue to fall, increasing the debt position of many farmers. Business loan demand at many District banks sagged during the third quarter, and only large banks expect a pickup in coming months.
Consumer Spending
Retail sales results were mixed throughout the Twelfth District
states in September and early October. But overall, sales at major
department stores appear to have shown little or no increase from
August's reduced pace. The four major department stores in Southern
California described back-to-school and early fall business as
"disappointing". In September, their year-to-year gain in sales
narrowed to 8 percent compared with 13 percent in August and 17
percent in July. Retailers attributed this weaker performance in
part to unusually warm weather which hindered sales of autumn
apparel. But the fact that sales of furniture, housewares and
appliances fell indicates that the housing slowdown is taking a toll
on consumer purchases of durable household items. Retail sales also
were disappointing in Utah and Idaho. In contrast, retailers in the
Pacific Northwest apparently experienced a pickup in sales after the
mid-summer slowing. Throughout the District, automobile and
recreational vehicle sales were reported to have declined in
September, but mainly due to supply problems. Retailers generally
have lowered their expectations for Christmas business. But
department stores still expect an average year-to-year sale, gain of
8-10 percent.
Manufacturing and Mining
The growth of manufacturing employment in most Twelfth District
states has slowed dramatically recently, both because the growth of
consumption of many key products manufactured in the area has slowed
but also because lower-priced foreign imports are supplying on
increased share of U.S. markets. The influx of imports has forced
further cutbacks in employment in the metals and lumber industries
and recently has begun to undermine domestic paper orders and prices
as well. Moreover, the fact that inventories of such
internationally-traded commodities as copper, aluminum and paper
have continued to rise suggests that domestic producers may be
forced to cut output further. If the Administration approves
legislation recently passed by Congress, Pacific Northwest forest
products firms could receive substantial relief from the burden of
high-cost federal timber under contract. Still, lumber market
conditions are so weak that many companies are expected to operate
at a loss in 1984. Rising federal expenditures for defense and space
programs and increased business investment continue to boost
employment in such industries as electronic equipment, aircraft and
missiles and nonelectrical machinery. But even in those industries,
employment growth is slowing.
Construction and Real Estate
Housing starts in the West have shown further weakness recently,
despite a slight reduction in mortgage interest rates. Western
starts have held up somewhat better than those nationally but still
are currently running about 27 percent below this year's peak
reached in January. Because builders have reduced the construction
of new homes about in line with the decline in sales, their
inventory of unsold new homes has not risen to excessive levels.
Nevertheless, builders expect Western housing starts to fall further
in 1984 and 1985, even if mortgage rates remain at current levels.
Falling permits reinforce the likelihood of a further slowdown in
regional homebuilding. High interest rates have not impeded the
virtual boom underway in nonresidential construction activity in the
West. Portland is doing particularly well in attracting investment
in high-technology manufacturing plants. Office vacancy rates are
reaching disturbing levels in major metropolitan area, however,
reducing rents below year-ago levels.
Agriculture
In general, the Twelfth District agricultural sector continues to be
in a difficult period financially, especially those farms which are
highly leveraged. The strength of the dollar is reducing exports,
while putting downward pressure on prices through a large influx of
imports. Summer and fall crops in the region have been especially
abundant, further reducing prices. Even in California where total
net farm income may be up in 1984, the return on equity generally
will be unsatisfactory. In California, above-normal production this
year has combined with a carryover of surplus inventory to depress
prices for such commodities as grapes, nuts, and tree fruits to or
below the break-even point for many growers. California's cotton
crop is progressing well, but the strong U.S. dollar and prospect of
record world production continue to push prices lower. The situation
of rice growers is especially troublesome, since such countries as
Taiwan and Thailand have stepped up their exports. In California,
Utah and other Intermountain states, the livestock sector has not
experienced significant year-to-year improvement in prices. Farm
Land values are still falling, while highly-leveraged farmers are
further increasing their debt position. In Utah, foreclosures on
farm loans are reported to be rising sharply.
Financial Institutions
Commercial and industrial loans at many Twelfth District banks
sagged during the third quarter, and bankers report mixed prospects
for the coming months. At large banks, business loans (not
seasonally adjusted) declined at a 3 percent annual rate over the
third quarter, in contrast to increases of 7 and 23 percent
respectively during the first and second quarters. Still, most of
the larger banks reported continued strong demand from certain
borrowers, especially high technology firms, retailers, builders,
and the service industries. Moreover, these banks expect improved
retail sales, strong capital spending, and a slowdown in the growth
of corporate profits to boost overall business loan demand in the
near future, although lover inventory financing requirements will,
offset some of this expansion. Smaller banks—especially those
located in regions dominated by the mining, lumber, and energy
industries—also have experienced weaker demand for credit in
recent months. But these banks generally do not expect business loan
demand to pick up, due to the effects of continued high interest
rates and import penetration in depressing their local economies.
Moreover, an increasing number of firms in their market areas are
trying to limit their investment to an amount that can be financed
with internally generated funds.