Beige Book Report: San Francisco
August 3, 1987
Summary
Overall, the Twelfth District economy appears healthy, although wide
variations across regions and industries exist. Trade and the
services are among the strongest sectors in most areas.
Manufacturing activity appears to be picking up, and the forest
products industry remains strong despite the rise in interest rates
that occurred last spring. The new immigration bill has caused some
disruptions in the apparel and agriculture industries, although
production levels do not appear to have suffered substantially.
Construction activity has slowed markedly, particularly in the
multi-family and nonresidential segments of the market. The higher
interest rates seen this spring appear to have reduced the overall
demand for mortgage financing, and many banks have changed mortgage
features in order to boost demand.
Consumer Spending
The trade and service sectors continue to pace economic growth
throughout the Twelfth District. In Tacoma, a recent survey found
that 41 percent of the area's employers intended to increase staff
during July, August, and September, a sharp increase from 11 percent
last year. The strong demand has led to wage increases for many
categories of office workers in the Puget Sound area. Tourist
activity in the Puget Sound area also is reported strong, with the
number of ferry passenger trips running 10 percent ahead of last
year, and highway traffic up 6.5 percent.
Manufacturing
Several aluminum plants in Washington have come back on line after
complete shutdowns, due to a combination of higher output prices,
the lower value of the dollar, Increased demand generated by
economic expansion during the first quarter, and accommodative
pricing by the Bonneville Power Administration. In Utah, USX is
reopening its Geneva steel plant.
Apparel production in the Los Angeles area reportedly exceeds last year's pace, although the uncertainty generated by the new immigration bill has created problems for some producers. For example, some small apparel firms are operating below full capacity due to labor shortages, while other southern California producers reportedly have moved their plant operations to Mexico to take advantage of easier access to low-priced labor.
Agriculture and Resource-Related Industries
In many areas, agricultural labor markets have been affected by
uncertainties associated with the new immigration bill, but reports
of actual crop losses have been relatively infrequent. The impact
has been mitigated in most regions by strong recruiting efforts,
changes in enforcement procedures, and wage increases. For example,
in Washington, wages reportedly rose from $3-4 per hour to $5-6 per
hour. Unusually large strawberry harvests in the Northwest and grape
and tree fruit shipments In the San Joaquin Valley confirm that crop
losses thus far appear to ha it been relatively minor. However, one
estimate puts crop losses in Oregon due to labor shortages at $300
million to $1 billion. Several growers report that their paperwork
and administrative costs have increased substantially, and many are
devoting significant resources to providing documentation for
workers seeking legal residency. In Washington, the upcoming apple
harvest is expected to be larger than usual, which could increase
labor demand and, along with possible lower product prices, create a
tight squeeze on profit margins. Moreover, an Oregon rancher says
that farmers of some labor-intensive crops, such as sugar beets and
onions, may cut back on plantings of those crops in future years if
difficulty in recruiting good workers continues.
Production and profitability in the Northwest lumber industry appear to be holding up despite concerns regarding the impact of higher interest rates. The low value of the dollar continues to make U.S. exports attractive on world markets. In addition, Northwest producers' competitive positions vis-a-vis Canada have been enhanced by the 15 percent tariff on Canadian lumber exported to the U.S. and by a recent increase in the value of the Canadian dollar relative to the U.S. dollar. The industry continues to operate at or near capacity in Oregon, while strong Japanese demand for pulp is stimulating Alaska's timber industry.
Construction and Real Estate
Construction activity has slowed markedly in most parts of the
District, with relatively mild declines in single-family
construction activity exacerbating the more severe downturns in
multifamily and nonresidential building. In the Seattle area, the
number of housing permits currently stands 9 percent below its year-
earlier level. In the Phoenix area, construction employment has
dropped by about 11 percent during the past year. In Utah,
multifamily construction is down 76 percent from last year and
single-family starts are down 12 percent. In Alaska, which has been
hard hit by oil-related weakness, real estate values reportedly have
fallen by some 21 percent over the past year. Finally, in the San
Diego area, one of the fastest growing regions of the country, a
banker reports that new construction loans dropped 56 percent
between March and June.
Financial Sector
The changes in financial conditions during the second quarter have
tilted the mix of mortgage lending away from fixed and toward
variable-rate instruments for most lenders. One California banker
reports that fixed-rate mortgage business has dropped by 50 to 60
percent from the levels of early this year, raising average overhead
costs, reducing profit margins, and leading to a virtual price war
over ARMs. However, a Seattle-area banker reports no such change,
arguing that buyers are doing all they can to qualify for fixed-rate
instruments.
The rise in rates has squeezed many banks' profit margins, and the decrease in buying activity has reduced mortgage fee income as well. Some larger banks have developed new mortgage products to boost demand. Innovations include lower mortgage fees, longer loan rate commitments, shorter maturities, balloon mortgages, bimonthly and biweekly payment plans, and ARMs that are convertible to fixed rates at some point early in the life of the mortgage.