Beige Book Report: San Francisco
November 1, 1989
Summary
The economy in the West continues to grow at a healthy pace.
Respondents continue to expect relatively slow growth during the
next year. Wage and price increases remain modest. Consumer spending
growth has stabilized at a healthy rate, with inventories reported
to be in line with desired levels. Most reports of manufacturing
activity indicate strength, with several manufacturers planning
expansions. Agriculture and resource-related industries continue to
perform well. Construction and real estate activity continue strong
throughout the District, with Arizona the major exception. Western
banks continue to report healthy conditions. Most businesses in the
San Francisco area have resumed operations since the earthquake, but
road closures and property damage are delaying a complete return to
business as usual.
Business Sentiment
Expectations regarding GNP growth are holding steady, with 73
percent of respondents continuing to anticipate somewhat slower
growth during the next twelve months. Expectations regarding most
components of GNP are essentially unchanged, although expectations
about business investment improved and expectations regarding
housing starts and the trade balance deteriorated somewhat.
Wages and Prices
Little change is reported in wage and price conditions, For the most
part, upward pressures on wages and prices remain modest. A West
Coast retailer notes that his prices seem to be moderating after a
surge early this year. Labor shortages in many parts of the District
are putting upward pressure on entry-level wages. Respondents in
some states report that recent increases in the minimum wage have
had little effect on labor costs, since employers must pay even more
than the new, higher minimum wage to attract entry-level workers.
Consumer Spending
Consumer spending continues to grow modestly. Retailers report that
inventories are close to desired levels. While many Bay Area
retailers survived the earthquake with relatively little damage, a
few experienced inventory or structural losses that are hurting
profits for their stores. Some auto dealers report inventory
shortfalls due to the recent sales strength combined with delays in
receiving 1990 models.
Manufacturing
Many manufacturers in the West continue to report solid
manufacturing activity. Capacity constraints in commercial aircraft
manufacturing still exist, but no longer are getting worse. Capacity
at Boeing was underutilized through most of October because
mechanics are on strike. Investment spending in commercial aerospace
is expected to be lower during the next year than it was during the
past year.
A paint and coatings manufacturer reports that demand for his company's products has been higher in 1989 than it has been since 1979. This company does not plan to increase investment spending in 1990, but it has purchased property that would facilitate expansion should it be called for in the future.
A newspaper publisher reports plans to expand press facilities, in order to increase both capacity and efficiency. These plans include an increase in investment spending for 1990 over its 1989 level.
Agriculture and Resource-Related Industries
Agriculture and resource-related industries continue to perform
well. Prices for agricultural products are reported to be strong,
and agricultural producers continue to seek expansion of their
export markets. A food processor reports that inventories have
increased significantly during the past year. He notes that this
increase could cause a drop in prices unless export sales rise
significantly.
Construction and Real Estate
Construction and real estate activity continue strong throughout the
District, with Arizona the major exception. One respondent reports
that strong demand for commercial properties from investors in
Japan, Korea, Taiwan, Hong Kong, and Singapore is exerting upward
pressure on the prices of commercial properties. Prior to the
earthquake several respondents in California noted that appreciation
of residential properties seemed to have slowed considerably. It is
not clear whether the earthquake will significantly affect property
values outside the hardest-hit areas. Although many roads and
buildings remain fundamentally sound, work crews are busy
demolishing unsafe buildings and repairing those structures that can
be fixed. Repair and rebuilding activity is expected to continue for
at least two years.
Financial Sector
Western banks continue to report healthy conditions. Several banks
report robust growth in construction loan activity during recent
weeks. Competition for deposits and for quality loans continues to
be stiff.