Beige Book Report: San Francisco
October 23, 1986
Summary
Although problems in some sectors and regions continue, the Twelfth
District economy appears to be improving overall. Consumer spending,
particularly on new cars, continues strong. Manufacturing of
aerospace products and defense related electronics continues to
boost the economy, although weak business investment is hurting non
defense related electronics producers and more traditional heavy
industries. Weakness in world grain markets continues to trouble
some farmers, but the reduced foreign exchange value of the dollar
and the 1985 farm bill as well as stronger prices for many non-grain
crops are improving prospects for others. Forest products companies
also are benefiting from a series of positive developments,
including the value of the dollar, low interest rates, strikes in
Canada, and strategic decisions they made during their slow years in
the early 1980s. Residential construction activity continues strong,
although it has slowed from its earlier frenetic pace, while
nonresidential construction activity, hurt by high vacancy rates and
tax reform, weakens in most areas. Bankers report slow commercial
loan demand, mostly due to overcapacity and low profitability rather
than to tax considerations.
Consumer Spending
Throughout the Twelfth District, retail sales continue to provide a
major source of stimulus to local economies. Tourist traffic has
been strong in some areas, such as the Pacific Northwest, but
disappointing in other areas, such as southern California.
Car and truck sales grew during the late summer in many areas, although several respondents attribute the strength to incentive financing and expect sales to slow when incentives stop. However, due to lingering weakness in the economies of the intermountain states, car and truck sales in Utah for the first half of 1986 were 7 percent below 1985, while in Idaho they were down 16 percent for the first eight months of the year.
Manufacturing
Aerospace and aerospace-related electronics continue to provide a
source of strength in many parts of the Twelfth District, including
Los Angeles, San Francisco-San Jose, Phoenix, Salt Lake City, and
especially in Seattle.
However, weakness in business investment is apparent in other sectors. For example, levels of production and employment in non- defense computer related industries have declined in several parts of the West, including Oregon and eastern Washington. California's primary metals, metal fabrication, and machinery industries also are experiencing declining activity levels.
Agriculture and Resource Related Industries
In eastern Washington and southern Idaho, the fruit, potato, and
bean crops are strong and exports of these products are gaining
slightly. Reduced potato acreage has caused prices to
improve from last year's depressed levels. Early season Washington
apple prices are stronger than last year, and larger apple harvests
are expected in both Washington and Oregon.
California and Arizona cotton producers are benefiting from an increased volume of cotton exports, attributed primarily to the export enhancement provisions in the 1985 farm bill. Cotton exports through the port of Stockton increased by 36 percent over last year's level. Wheat exports through western ports also have increased, but inventories remain high and world market conditions continue to be depressed.
Forest products companies in Oregon, Washington, Alaska, and northern California also are benefiting from the reduced foreign exchange value of the dollar, although there is considerable variation in the extent of benefit depending on the specific products made in each area. The increased exports have been attributed partly to the reduced value of the dollar against both Japanese and European currencies. Although the strength of the U.S. dollar relative to the Canadian dollar continues to place pressure on U.S. producers, recent strikes in Canada have helped U.S. prices and production. Throughout the District, forest products firms continue to invest in more efficient equipment and to gain wage concessions. Thus, although industry production is substantially greater than it has been for the past several years, employment and wage levels are unlikely to return to their previous peaks. As a result, the timber dependent areas of the Pacific Northwest continue to experience poor economic performance.
Construction and Real Estate
In general, residential construction continues to buoy the economies
of many parts of the West, while nonresidential activity remains
slow. However, there are many exceptions due to differences in local
conditions. For example, in both Idaho and Alaska residential as
well as nonresidential construction activity has slowed because of
weaknesses in those states' economies.
Financial Sector
Several bankers reported low commercial and investment loan volumes
due to low profits, low capacity utilization rates, slow consumer
demand, and import competition. Interestingly, few thought that tax
reform had depressed investment lending, although several expected
borrowing by "investment intense" industries to slow in 1987.