Beige Book Report: San Francisco
January 28, 1987
Summary
The end of 1986 saw continued moderate growth in most parts of the
Twelfth District, although some areas failed to share in the overall
growth. The Christmas season was a good one for retailers in most
parts of the District. Manufacturing industries continued to present
a mixed picture, with strong aerospace activity but weakness in
other areas including electronics. Oil and copper mining activity
appear to be inching ahead, a marked improvement from the sharp
downslides seen until recently in both sectors. Construction and
real estate activity were affected by tax reform considerations at
the end of the year, and activity in single-family home markets
currently is much stronger than is multi-family or commercial
activity. Financial developments reflect those in the real estate
sector, with tax-related activity at the end of the year, weak
multifamily and commercial lending, and continued strong mortgage
activity.
Consumer Spending
The Christmas season got off to a slow start in many parts of the
District, but a pickup later in the season led to satisfactory sales
growth in the 5 percent range in most areas. Washington retailers
reported sales growth of about 10 percent, which they attribute in
part to the year-end bonuses averaging $3000 that over 115,000
Seattle-area Boeing employees received. The gains in Washington were
particularly welcome because they were achieved with few price
markdowns. In sharp contrast, respondents from some communities with
weak economies, such as Idaho and some agricultural areas in eastern
Oregon and central California, reported flat or even declining sales
and aggressive promotional activity.
Reports indicate that end-of-year auto sales were strong in most parts of the West, largely due to the elimination of sales tax deductions. Some respondents reported particularly dramatic year-end sales surges for luxury automobiles. In Oregon, which has no sales tax, little change in activity at the end of the year was reported. Most observers agree that the year-end sales spurt borrowed from next year so sales during the first few months of 1987 are expected to be slow. Evidence regarding the impact of tax reform on the purchase of other consumer durables is more mixed, as some respondents reported significant effects but most reported little discernable year-end activity.
Manufacturing
Little has changed for the West's major manufacturing sectors.
Western defense contractors continue to pull in large projects,
while orders for commercial aircraft also continue to roll in. These
developments represent good news for Seattle and Los Angeles, as
well as the many other western cities for which aerospace activity
contributes to the local economy.
The electronics and semiconductor industries continue to suffer the consequences of weak demand, fierce competition, and resulting low prices. For example, one Utah company recently announced a layoff of just over 10 percent of its employees. Many companies throughout the District lost money in 1986.
Mining
At the end of 1986 some glimmers of hope began to appear for various
beleaguered sectors of the mining industry. In Utah, copper
companies were hiring rather than laying off workers, while in Kern
County (California) sore laid-off oil workers have been called back
to their jobs. Moreover, some previously shut down oil wells in Kern
County now are pumping again.
Construction and Real Estate
Construction of multifamily and nonresidential building has slowed
considerably in most parts of the District, and respondents agreed
that overbuilding has reduced substantially the incentive to build.
Some areas saw further slowing just prior to the January 1
imposition of the new tax bill, but this was not true in areas where
economic conditions caused a slowdown in activity during the second
half of 1986. Some observers also report that because changes in the
tax law have reduced the attractiveness of real estate as an
investment, real estate prices have fallen or are expected to fall
in the near future.
Single-family construction activity continues to fare much better because the reductions in interest rates already seen have made housing more affordable. No tax related changes have been seen or are expected in single family home building.
Financial Sector
Reflecting changes in construction activity, the demand for
construction loans dropped off sharply during the last months of
1986. However, there was a surge in tax-related deals at the end of
the year as sellers raced to collect capital gains under the old tax
law, which generated additional loan demand among buyers.
Mortgage lending volume fell towards the end of 1986 in some areas, but remained very strong in California. Through the first ten months of 1986, California savings and loans had closed 50 percent more mortgage loans than they had during the same period of 1985, and loan commitments for October suggested that the trend was likely to continue through the end of the year. Thus, resale activity remained strong even though housing starts declined over the same period. In addition, some lenders report that home equity loans are becoming more popular as borrowers seek to deduct their interest payments.