Beige Book Report: San Francisco
June 24, 1986
Overview
The Twelfth District economy continues to be generally prosperous,
although some problems remain. The volume of retail sales, while no
longer spectacular, is still healthy and is benefiting from
increased tourist traffic. Most manufacturing industries continue
their weak performances, although lumber sales are benefiting from
the boom in housing construction and commercial airplane orders
continue strong. Similarly, problems continue to plague most
agricultural producers, although some are doing quite well,
including growers of apples, berries, and citrus fruits. While low
interest rates have created a boom in construction of single family
homes, weakness in most commercial real estate markets has caused
the pace of office and apartment construction to slow. Reflecting
these trends, banks report strong mortgage activity but few closings
in commercial real estate loans.
Consumer Spending
Overall, consumer spending continues to provide a boost to the
Twelfth District economy. However, in some areas with troubled
economies, including for example Idaho, sales are relatively weak.
Moreover, auto sales are flat or down in many areas, and imported
cars remain popular despite the price increases of recent months.
Throughout the District, preliminary evidence suggests that high expectations for this summer's tourist traffic will not be disappointed. Washington and Oregon should post particularly strong performances, due to Expo '86 in Vancouver. In Seattle, hotel occupancy currently stands 13 percent above its year-ago level. The Portland airport has experienced strong passenger traffic this spring and ticket sales for the Shakespeare Festival in Ashland, Oregon are currently outpacing last year's record level.
Manufacturing and Mining
Manufacturing continues to be a relatively weak sector in the West.
Although the outlook for electronics firms has brightened during the
past few months, investment and hiring activity remain sluggish.
Moreover, the prospect of cuts in the defense budget, together with
lingering uncertainties about the future of the space program, have
put a damper on the previously brisk pace of government contract
activity in the aerospace industry. At the same time, the continuing
large number of orders for commercial airplanes benefits aerospace
firms, which provides a boost to the Seattle area economy.
Forest products companies are enjoying a burst of activity associated with the current surge in homebuilding. Nevertheless, profit margins remain thin, particularly after the sharp drop in prices during the past month, so few firms are expanding and cost cutting efforts continue.
Low oil prices have slowed oil activity in the Twelfth District, although less so than in other regions of the country. In Alaska, the rig count is little changed from the beginning of the year, but exploration activity has fallen substantially. In southern California, one company has put back on line about half of the rigs it closed last month.
Agriculture
In most parts of the Twelfth District, agricultural problems
continue. Weaknesses in the markets for wheat, beef cattle, and
cotton are particularly persistent, and most respondents agree that
the lower foreign exchange value of the dollar, lower interest
rates, and lower oil prices are insufficient to turn those sectors
around.
Some major crops are quite profitable this year, including apples in Washington and berries in Oregon. However, high prices and low inventories for both products are partly the result of crop damage in some parts of those states. In California, citrus and fresh fruit farmers are doing well, and the lower value of the dollar continues to benefit wine and almond producers. Crop damage to almonds in northern California should further benefit those producers that have good crops.
Construction and Real Estate
Construction of single family homes, stimulated by low interest
rates, is strong in most parts of the Twelfth District. With the
exception of retail building in some fast growing areas such as San
Diego, commercial construction is much less robust than is
homebuilding. High vacancy rates have combined with uncertainties
about tax reform to slow office, apartment, and hotel building
activity in most areas.
Financial Sector
Strength in mortgage lending and refinancing activity has created
serious appraisal and mortgage evaluation backlogs for some lenders.
Partly as a result of these backlogs, mortgage interest rates have
risen about a percentage point during the past month.
Refinancing activity is strong for commercial real estate as well, but in most areas there is little demand for new commercial real estate loans. Lenders are scrutinizing closely the applications they do receive because they are concerned about the high vacancy rates and the potential for unprofitable projects.