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Beige Book Report: San Francisco

December 1, 1986

Overall improvement in the Twelfth District economy appears to be continuing. The trade and service sectors continue to stimulate growth in regions not hard hit by other economic problems. Available information suggests that exports of products manufactured in the West are likely to improve. Moreover, markets for some western agricultural products, including potatoes, pistachios, and grapes, have improved in recent months. Forest products industries are prospering while gold and copper mining appear likely to recover during the next several months. Although single family residential building activity has slackened in recent months it remains relatively healthy. Apartment and nonresidential construction activity, in contrast, continues to weaken in many areas. Surveyed bankers agree that asset quality problems are likely to continue through next year, particularly in sectors that have experienced problems already.

Consumer Spending
The trade and service sectors continue to flourish in most parts of the Twelfth District. Retail sales growth has been very strong in Washington and California, and has been satisfactory in Oregon as well. However, in areas with struggling economies sales are weak. In Idaho, for example, retail sales have shown virtually no increase during the past 24 months. Alaska retail sales also have been slow. In California's central valley, retail sales reportedly have been flat, which actually represents an improvement compared to recent declines.

Manufacturing
Several respondents argued that exports of manufactured products should improve soon. Exports of some electronic products have risen in recent months due to the reduced value of the dollar. Aircraft exports have shown strong improvement, largely due to global increases in demand for commercial aircraft.

Capital goods producers indicate that machinery orders from Europe are picking up, due to declining U.S. production costs as well as to the declining U.S. dollar. In addition, one respondent reports that Japanese distributors have begun contacting U.S. companies about purchasing consumer products, partly because Japan now is encouraging the purchase of U.S. products and partly because of the changing dollar-yen relationship. Taiwan also is beginning to promote imports from the U.S. in an attempt to deter U.S. protectionist measures.

Recent trade developments are not all positive, however. Forest products industry sources report that the decline of the U.S. dollar has only slightly increased the prices of imported machinery used in lumber mills. This machinery, most of which is produced in northern Europe and Scandinavia, still enjoys price and quality advantages relative to U.S. made machinery.

Agriculture and Resource Related Industries
Although problems continue for many Twelfth District farmers, some recent improvements have been noted. In Idaho, potato prices have risen significantly, providing farmers a chance to return to profitability. In California, the pistachio crop harvest was the largest ever recorded, and the bumper crop should not depress pistachio prices much because pistachios bear only in alternate years. Although 12 percent fewer wine grapes were harvested this year than last year, grape prices are higher than last year's.

Most economic indicators in the forest products industries suggest that, despite the national slowdown in residential construction, prosperity has returned at least for the moment. In Oregon, the number of millworking jobs in September set a new record for that month. Exports of many forest products, including lumber, pulp, and paper have increased, although not dramatically. Competition from Canada has been less fierce lately, partly because Canadian lumber workers are on strike with little hope of an imminent settlement, and partly because a preliminary ruling that would impose a 15 percent tariff on softwood lumber imports from Canada requires that, while waiting for a final decision, Canadian exporters post a bond with customs officials equal to the 15 percent duty.

The lingering problems of the mining industry in Utah appear to have bottomed out, and stability or perhaps even slight improvement is expected during the coming months. The outlook for the copper industry currently is much brighter than it has been for several years, and some observers expect copper to be a source of strength during the coming year. The prospects for gold mining in Nevada also have improved. Additional gold deposits have been discovered, but at this point it is unclear whether they can be mined profitably.

Construction and Real Estate
In most areas of the District, the pace of multifamily and nonresidential construction is slowing. Single family home construction remains relatively strong despite recent slackening. Although activity has been heavy in both new and used home markets, housing prices in most areas reportedly are fiat or down.

Financial Sector
Surveyed bankers indicate that significant loan quality problems are likely to continue in such sectors as agriculture, energy, consumer credit, and commercial real estate. In addition, a few bankers expect problems to emerge in health care portfolios. Strength in mortgage portfolios should at least partially offset these problems.