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San Francisco: August 1989

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Beige Book Report: San Francisco

August 9, 1989

Overall economic conditions in the Twelfth Federal Reserve District continue healthy, although the pace of growth appears to have slowed from that seen earlier this year. Retail sales growth is satisfactory but not robust, with weakness in "big-ticket" items including automobiles. Manufacturing activity continues healthy, with strength in commercial aircraft and relatively slow growth in electronics. Most western fruit and vegetable producers are having a good year, although concerns about food safety have hurt sales of apples and table grapes. Log shortages in the Pacific Northwest have resulted in higher prices for lumber and wood chips. Construction and real estate activity continue healthy in most parts of the District, with some cooling noted in California, while the market is heating up in the Seattle area. Western bankers report strong loan demand, but slow deposit growth and stiff competition for deposits.

Business Sentiment
Twelfth District business leaders polled during July expect the economy's growth rate to slow during the next year. Almost three quarters of those questioned expect GNP to grow more slowly during the next year than its 2 1/2 to 3 percent historical rate. A majority of respondents foresee weakness during the next four quarters in consumer spending, business investment, and housing starts. Over half expect the inflation rate to fall during the next year.

Trade and Services
Sales at most department stores are reported to be satisfactory, not especially strong but strong enough that retailers are not particularly concerned. However, uncertainty about the future of southern Oregon's lumber industry has caused a slump in retail sales there. In recent months, District sales of women's apparel have improved, but the men's clothing market has weakened. Weak sales continue for "big-ticket" items, such as electronics, furniture, and appliances.

Auto sales continue weak in most parts of the District, as rebate programs have not yet reduced excessive inventories to acceptable levels. One banker notes that many customers attracted by the discount programs cannot obtain financing due to their poor credit histories.

Wage trends in the trade and service industries are mixed. Retailers report some wage pressures, particularly at the low end, although one notes that these pressures are "manageable." A transportation services firm recently negotiated a new four-year contract that includes annual wage hikes of only 3 percent. However, wage pressures are intense in the health services. Nurses in several parts of the District are seeking double-digit wage increases in their new contracts, and strikes have begun at some hospitals.

Manufacturing
Bottlenecks in the commercial aircraft industry seem to have stabilized, as gradual progress is being made on increased output. A Seattle-area avionics subcontractor reports "extensive" pressure on wages, while in southern California, the downturn in defense spending is releasing workers and making them available to support commercial production.

Some softness in orders for electronic components is reported. One manufacturer reports that his sales grew by 15 to 25 percent in each of the past three years, but growth currently is running at only a 3 percent pace.

Agriculture and Resource-Related Industries
Most western fruit and vegetable producers are having profitable years. Pacific Northwest food processors report that they have already booked 1989 orders that exceed 1988 totals. Most frozen fruits and vegetables are now in short supply, with inventories of frozen peas, green beans, and sweet corn the lowest in ten years. Prices of most processed vegetables have jumped 15 percent or more in the past year. Wet weather on the East Coast has hurt tomato production there, which has boosted California sales. However, grape and apple producers report declining sales which they attribute to concerns about safety. The inventory of unsold apples currently stands at a record 6.7 million boxes, double the amount a year ago.

Limited log supplies have boosted the prices of Northwest lumber products dramatically in recent months, despite reduced lumber demand. The price of a Northwest two-by-four rose 14 percent between the second quarter of 1988 and the second quarter of 1989. The reduced supply of timber also has doubled the price of wood chips, a key input to pulp and paper manufacturing.

Construction and Real Estate
Construction and real estate activity continue strong in most parts of the Twelfth District. In California, the frenetic pace of the past year appears to have cooled somewhat, as fewer sales involve bidding wars. As a result, homes are staying on the market longer and prices are rising more slowly.

At the same time, Seattle's real estate market has taken off, with reports of double-digit annual price increases. Construction activity also is booming, and some contractors are so busy that they are declining opportunities to bid for new work.

Financial Sector
Most western bankers report strong loan demand and slow deposit growth. Many institutions report that their profits have risen in recent months. However, several bankers note that stiff competition for deposits is forcing them to raise deposit rates, so they expect profit margins to fall.