Beige Book Report: San Francisco
June 21, 1989
Summary
The pace of growth in the Twelfth Federal Reserve District continues
to be healthy, with mixed signals regarding a possible slowing rate
of growth. Despite the relatively good condition of the District's
economy, two thirds of the business leaders contacted expect
weakening national growth during the next four quarters. Consumer
spending growth is reported to be healthy overall, despite weakness
in sales of "big ticket" items such as cars, furniture, and home
electronics. Manufacturing activity continues to be robust, with
bottlenecks and tight raw materials supplies reported in several
sectors. However, some early signs of falling export orders have
emerged. Agricultural activity also is strong overall, despite
rising prices for many inputs. Lumber production is falling as log
supplies continue to tighten, but capacity continues tight at many
paper mills. Real estate markets are strong in the coastal states,
although a few respondents note heightened concerns or slowing
activity associated with relatively high interest rates. In Arizona,
however, commercial and residential real estate markets continue to
languish. Most western banks report solid loan demand, while many
banks are raising rates on certificates of deposit to attract
sufficient funds.
Business Sentiment
Two thirds of the western business leaders contacted expect GNP
growth to be weaker than its historical average during the next four
quarters, although very few anticipate a recession. Most of the
remaining third expect GNP growth close to its average pace.
District business leaders still expect performance in the business
investment and home-building sectors to weaken slightly during the
next year, although they are more upbeat about these sectors than
they were in the previous survey.
Consumer Spending
Consumer spending continues to grow at a healthy pace. Nevertheless,
several respondents report a moderating rate of growth, which they
attribute primarily to relative weakness in sales of such "big
ticket" items as furniture and home electronics. Some retailers have
expressed concern that inventories have gotten too heavy, while
others report no inventory problems. Prices and wages are reported
to be relatively stable, with prices held down in part by the recent
increase in the value of the dollar.
Many respondents report weak car sales, although sales in some parts of the District are strong. No upward price pressure is evident, as incentives are required to keep sales volumes up.
Manufacturing
Bottlenecks continue in the commercial aircraft industry. Supplies
are difficult to obtain, skilled labor is in short supply, and
commercial aircraft ordered today cannot be delivered for about four
years. Industry participants assert that these bottlenecks are
putting upward pressure on Seattle-area wages and on materials
prices. One aerospace executive reports that his firm's contracts
with European and Japanese suppliers are priced in those nations'
currencies, so the recent increase in the dollar's value has reduced
his costs. In contrast, the cutbacks in defense spending are
beginning to affect some California firms. One firm recently
announced layoffs, and the competition for engineers reportedly has
diminished.
Heavy machinery is selling well, with reports of increases in sales volumes of 10 to 15 percent above last year's levels. Some manufacturers report that material costs have risen 5 to 12 percent, due primarily to higher costs for aluminum, stainless steel and brass. One respondent notes persistent shortages of titanium dioxide and ethylene glycol, important raw materials for paints and coatings. List prices for paints and coatings have increased about 5 percent, but price increases negotiated for large projects are closer to 1 or 2 percent.
A California banker reports that some customers in Japan are starting to cancel orders for U.S.-made manufactured goods. Some of these customers have been faced with price increases of about 21 percent (5 percent reflecting US inflation and 16 percent due to currency changes). Other Japanese customers are asking for price reductions, but because most American companies' profit margins are too small to make sizable price concessions, they are opting to forgo some export business.
Agriculture and Resource-Related Industries
Agriculture generally continues healthy, although the costs of
interest, machinery, fuel, fertilizer, and feed grains remain
relatively high. Few changes in exports due to the higher dollar
have been noted as yet.
Environmental and legal issues are combining with strong log exports to restrict log supplies and reduce lumber production. Capacity continues tight at most paper mills. However, new newsprint production capacity and soft newsprint demand have forced producers to back down from planned price increases this year, and one negotiated discount reduced the effective price by 3.5 percent.
Construction and Real Estate
Most reports suggest that California's real estate markets continue
strong. Smaller California cities have not seen the 20 percent
increases in home prices common in larger cities, but construction
activity continues strong. However, relatively high interest rates
reportedly have caused builders to become more cautious about
committing to new projects. The limited supply of commercial
buildings in the San Francisco Bay Area is causing values to
escalate at about a 5 percent annual rate. In Southern California, a
developer reports that commercial construction activity continues at
a strong pace, although leasing activity has slowed during the past
year. Most reports from Washington and Oregon indicate that real
estate markets in the Northwest also are strong. Home prices are
reported up, with strong construction activity as well. In contrast,
reports from Arizona indicate that land values there continue to
drop, and sales of commercial real estate are deeply discounted.
Financial Sector
Most western banks report strong profits, with solid loan demand
despite relatively high interest rates. Some bankers report
increased demand for commercial loans. Several bankers report
reduced balances held in checking accounts, passbook savings, and
money market deposit accounts. The combination of strong loan demand
and reduced deposits is leading banks to raise rates on certificates
of deposit in order to attract sufficient funds.
Only a few respondents report that high interest rates have limited borrowing activity. In Oregon, for example, small businesses reportedly are borrowing less or not at all, choosing to postpone capital equipment purchases or expensive acquisitions rather than pay the high rates.