Beige Book Report: San Francisco
January 27, 1988
The Twelfth District economy continues to exhibit good health overall. Retail sales during the Christmas season appear to have registered modest increases, of about 5 percent, over last year's levels. Manufacturing, agriculture, and forest products industries continue to show improved sales, with much of the growth attributed to exports. Construction activity, however, is flat or down in many parts of the West, as builders wait for current inventories to be sold. Lending activity shows mixed trends. For most western banks, the number of mortgage applications is higher than it was earlier in the fall, but below last years levels, while installment lending is on a downward trend. Few bankers noted changes in lending patterns that they attributed to the stock market decline last October.
Consumer Spending
Reports suggest that Twelfth District retailers experienced sales
gains averaging around 5 percent over last year's Christmas season,
with a range of zero to 10 percent. For several stores, sales gains
were close to the original plans made before October 19. Many
respondents said that price cuts were deeper and earlier this year
than they were last year, but several others reported discounting
patterns similar to those of previous years. Reports on retail
inventories were mixed, with about equal numbers of respondents
reporting higher and lower inventories compared with last January.
Car sales are reported to have been slow in December in most parts of the District, and many dealers have accumulated inventories compared with three months ago and with year-earlier levels. One banker noted strong demand for boat loans through late fall, although there was a normal seasonal slowdown in December.
Manufacturing
Manufacturing activity continues to strengthen in the West, buoyed
by the lower foreign exchange value of the dollar. Some respondents
reported sharp increases in foreign equipment prices during early
January. In addition, aluminum producers in the Northwest are
enjoying a surge of activity generated by a combination of higher
aluminum prices, lower wages, and a favorable electric rate schedule
recently negotiated with the Bonneville Power Administration.
Airplane inventories at western aerospace companies are very lean,
due in part to strong export demand. Currently, one large firm has
more than two years' worth of orders for commercial aircraft on its
books.
Agriculture and Resource Related Industries
Energy sector activity in the West remains higher than it was a year
ago. In 1987, oil service firms posted losses equal to 4 percent of
sales, an improvement over the dismal performance of 1986. Although
the recent price decline did not reduce the demand for oil services,
it did dash hopes of further gains. At present, industry observers
expect drilling plans to remain stable if prices stay at or above
$15 per barrel.
Inventories are very lean in many export-oriented firms that produce paper, plywood, lumber, and logs. Drought-related logging restrictions have exacerbated the inventory tightness, so that log inventories stand at only 30 to 40 percent of their normal levels. The importance of export-related demand to these firms is illustrated by a major wood products firm, active only in the domestic market, which is experiencing just moderate growth, and is maintaining merely ordinary inventory production and inventory levels.
Many agricultural products also have seen strong exports in recent months. For example, wheat exports are up 25 percent compared with a year ago. Inventories of some western crops are slightly higher than they were a year ago, due primarily to higher 1987 yields. Inventories of principal California crops (almonds, cotton, rice) are expected to fall quickly due to the strong export activity.
Wine inventories are down, partly due to substantially lower imports, but also due to low grape yields last fall.
Construction and Real Estate
Construction activity is relatively sluggish in most parts of the
West. In Arizona, housing starts are down nearly 40 percent, with
multifamily construction at a virtual standstill. In contrast, the
strong export-led growth in the coastal areas of the Pacific
Northwest has buoyed both housing starts and commercial construction
in that area.
Financial Sector
Mortgage applications in December were down from their year-earlier
levels in most parts of the District, but some bankers pointed out
that the strong refinancing activity of a year ago accounts for much
of the decline. Some bankers reported increases in mortgage
applications between the third and fourth quarters of 1987, which
they attributed to the decline in long-term interest rates. However,
one banker noted a substantial decline in the number of requests for
new construction loans compared with six months ago and with a year
ago. Several bankers reported that demand for home equity loans was
strong throughout 1987.
Applications for consumer installment loans also were below their year-earlier levels at many western banks. In the Seattle area, one banker reported installment loan applications up about 2 percent from last year which, although better than most banks' experiences, represents a marked deterioration from the 13 to 14 percent growth rate this bank registered a year earlier. Several bankers noted no discontinuities in credit patterns associated with the stock market decline in October, although a few argued that the October crash reduced loan demand dramatically.