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Beige Book Report: San Francisco

January 24, 1990

Summary
Economic conditions continue to be healthy in the Twelfth Federal Reserve District. Business leaders continue to expect slow growth nationally, but their outlook has not worsened. Wage pressure is moderate in most areas of the District, although sharp increases are reported in parts of Washington. Retail sales were generally strong over the holidays, but heavy discounting held down profits. Manufacturing remains steady, with strong commercial aircraft orders offsetting weak electronics orders. Gains also are reported in machinery and food processing. Resource industries are healthy, with high prices boosting agricultural earnings and oil drilling. Forest products industries are re-tooling to process smaller logs, because of rapidly escalating log prices and anticipated additional shortages of old-growth timber. Construction and real estate activity remains strong in most parts of the District. Banks report generally good conditions, except for those in areas with serious real estate-related problems.

Business Sentiment
Western business leaders' expectations about the national economy showed little change in January compared to their previous responses. Three quarters of the respondents continue to expect GNP growth to be below its historical trend over the next four quarters. More respondents expected an improvement in housing starts, consumer spending, and the trade balance, but the general tenor of the responses indicate little fundamental change in outlook.

Wages and Prices
Wage and price pressures remain moderate in the District. Materials and labor costs in construction are reported to be rising, but more slowly than the CPI. Most wage increases are in the four to five percent range. A notable exception is in Seattle, where managers and technical workers are receiving 7 to 25 percent increases. Health care costs nationally are reported to be up about 10.5 percent from a year ago.

Consumer Spending
Holiday retail sales were generally healthy in the District. Most areas reported higher nominal sales than in 1988, but heavy discounting is expected to suppress profits. Sales were near expected levels in most parts of the District, although one respondent reported record sales in parts of Oregon. Heavy discounting was attributed in part to financial problems of some national chains with large debt burdens. Specialty stores performed especially well, according to respondents in the Northwest. Sharply higher spending by Asian tourists is keeping retail sales high in Hawaii.

Auto sales are reported to be down throughout the District. One respondent in Utah reports that dealers that normally sell 300 to 400 cars in December sold only 40 to 50 cars. Other areas report auto sales off 10 to 20 percent, with margins cut even further. A respondent in Oregon reports that auto dealers are cutting advertising budgets to reduce their costs.

Manufacturing
Manufacturing continues to show little growth in the West. One respondent reports that electronic component sales in Arizona are unchanged from a year earlier, although some gains are reported for small computer firms. Equipment orders are mixed. Backlogs are reported for farm equipment, and some expansion of capacity is reported. In contrast, construction equipment is readily available, with orders flat compared to a year earlier. Apparel production continues to rise in Southern California. Food processing also remains healthy, with strong gains in production and profits reported in Oregon. Electric utilities are not investing in significant new capacity in the Northwest, which is raising concern at aluminum plants about potential shortages.

Some labor reductions in defense industries are reported, but the commercial aircraft sector remains very strong. In addition to increasing orders for commercial aircraft, a respondent in Southern California reports a major increase in contracts to rehabilitate existing aircraft. Investment remains strong in aerospace. Boeing has announced planned cutbacks of 2,000 workers at one plant and it has delayed plans to expand production until the middle of the year, but it is expected to continue expanding and remodeling suburban plants. The engineers union has rejected a contract offer, but talks are continuing.

Agriculture and Resource-Related Industries
Agriculture remains healthy in the West, although drought is becoming a major concern in some areas. Exports continue to increase, although a shortage of grain transport vehicles is creating a bottleneck in some areas. Fruit and vegetable prices are very high because of freeze damage in Florida and Texas. Drought continues to plague California and parts of Idaho and Utah. The dairy industry reports high prices and expanding production. Beef producers report strong prices because of rising consumption and slightly lower input costs.

Respondents report increased investment in oil exploration in California, and natural gas deliveries in Utah are up 3.7 percent. Gold mining remains strong in Nevada, despite lower prices. Lumber mills are facing diminished margins because of rapidly rising log prices. Respondents report that many mills are investing in new machinery to process smaller trees in expectation of reduced supplies of old-growth timber in the future.

Construction and Real Estate
Construction remains strong in the District, with the exception of Arizona. Construction is very strong in Hawaii, with half of the spending in office and non-hotel building. Both residential and commercial construction are increasing in Utah and Southern California. One respondent reports increased construction in Sacramento, with old buildings being torn down and replaced by larger buildings. Prices continue to rise sharply in Washington, with appreciation of 2 percent per month reported in some areas. Some weakness in home sales priced above $300,000 is reported in parts of California, but lower priced homes continue to appreciate.

Financial Sector
Conditions remain healthy for commercial banks in most parts of the District, although banks in Arizona and Alaska continue to have real estate-related problems. Credit flows are very strong in the Pacific Northwest, led by 20 percent gains in real estate lending, and central parts of California. One respondent in Southern California reports strong loan demand and tightening criteria for making loans.