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Beige Book Report: San Francisco

August 6, 1985

Summary
The economy of the Twelfth District continues to present a mixed picture. In general, consumer spending and growth in service industries have remained strong enough to offset problems in manufacturing and resource sectors. However, available data suggest that consumer spending is weakening. Semiconductor and related industries continue weak, and some agricultural sectors now bear additional burdens of bad weather, pests, and product recall problems. Nevertheless, only one state, Arizona, reported higher unemployment in May than in April, and the 6.2 percent rate there remains well below the national rate of 7.3 percent.

Consumer Spending
Year over year consumer spending shows healthy increases in most sectors, although the limited available data on changes from month- earlier figures indicate possible recent softening. One exception is the central valley of California, where year over year retail sales comparisons show an inconsistent pattern of gains and losses, and auto sales fell 10 percent from June 1984 to June 1985. Sales tax receipts in Nevada and in the San Francisco Bay Area increased 12 percent and 13.5 percent, respectively, between May 1984 and May 1985. In Utah and Idaho, credit card sales and auto loan originations in June were well above those in June 1984 but below the levels seen in April and May, suggesting continued softening in retail sectors in the intermountain states. Sales at eating and drinking establishments, however, show particularly strong growth both in Oregon and in the San Francisco area. Auto sales in the Bay Area have improved from May 1984 but are unchanged from May to June of this year.

Manufacturing and Mining
The main bright spot in Western manufacturing is in defense and aerospace, in which there is little competition from abroad, particularly for government contracts. Continued weakness in manufacturing is felt particularly strongly in the western region by semiconductor and related firms. In the Northwest however, and particularly in Washington State, some high technology electronics firms, which rely less on personal computers for demand, are relatively insulated from the national slump. Throughout the Twelfth District, several firms have announced first quarter losses, layoffs, and mandatory unpaid holidays. Others have delayed or cancelled plant construction projects, although most construction projects in progress are continuing.

The wood products sector presents a mixed picture. While stronger than in the recent past, problems remain with competition from Canada and the strong U.S. dollar. Some firms continue layoffs and wage freezes, but others are returning laid off employees to work. In general, Oregon appears to be healthier than Washington. For example, one Oregon firm had strong paper earnings and orders in June, and expects a strong summer. In contrast, a Washington paper firm reports weakness in paper related to lower prices which now barely cover costs. One potential source of optimism in Washington is the weakening dollar, which has slowed the price decline. However, pressure on costs is sufficiently severe that production increases do not result necessarily in more jobs.

Mining sectors remain weak, with low prices and reduced employment in petroleum. With the exception of major gold mining and refining operations which have realized recent strength, there is no sign of improvement in the beleaguered mineral mining sector.

Construction and Real Estate
In general, building has been strong, although high vacancy rates in commercial and residential property in most parts of the district portend reduced construction activity in the future. While building permits remain strong in Phoenix, for example, many issued permits are not being used. Much of the residential building is focused on multifamily dwellings.

In some markets, signals are mixed. For example, in Idaho, May residential permits were 28 percent below May 1984, but the value of commercial construction was 45 percent above May 1984.

Agriculture
Natural and human misfortunes have combined with longer run problems to make this a bad time for most western agriculture. Cotton, almonds, and winegrapes, among others, continue to suffer from low world prices. The grape harvest again appears to be a bumper crop, raising the prospect of further declines in price. ln addition, hot, dry weather has ruined some winter wheat in Oregon. Grasshoppers in southern Idaho and a recall of California watermelons because of pesticide poisoning have added to agricultural problems.

Nevertheless, there are some bright spots (lamb prices, for example, are up substantially), and western agriculture's ability to switch acreage to more profitable crops remains a source of long run optimism.

Financial Sector
Interest rates continue to fall, with 15-year fixed-rate mortgages now offered at rates as low as 111/4 percent, and variable rate mortgages with initial rates of 9 percent. Many financial institutions report reductions in problem loans, improved loan quality and higher earnings, suggesting that most problems in the financial sector have already surfaced. Lower interest rates have improved the outlook for many financial institutions where rates on liabilities have declined faster than rates on assets. However, institutions which hold substantial assets in variable rate instruments are seeing their spreads squeezed.