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Beige Book Report: San Francisco

March 14, 1990

Summary
Twelfth District economic conditions remain fundamentally unchanged, with healthy growth in most parts of the West. Nevertheless, business leaders continue to expect relatively slow national growth during the coming year. Wage and price pressures are significant in parts of the District, but prices are stable or falling in others. Sales of soft goods remain satisfactory, but car sales pick up only when attractive incentives are offered. Manufacturing activity continues at satisfactory levels. Prices and production are strong for most agricultural products. Forest products firms, however, continue to scale back output as logging restrictions take effect. Some builders and developers report that they are finding it more difficult to obtain financing as many lenders tighten their credit criteria.

Business Sentiment
Expectations of Twelfth District business leaders have changed little during the past month, as 80 percent still expect that real GNP will grow more slowly than its historical average during the next year. Respondents still anticipate slow consumer spending. although the proportion expecting improvement rose from 2 to 13 percent. The proportion of respondents expecting a rising inflation rate increased from 11 to 39 percent.

Wages and Prices
Wage and price pressures vary significantly by sector and region. The cost of providing health benefits rose by 30 percent for San Francisco Bay Area employers during the past year, and respondents report continued upward wage pressure for health care workers. Price increases are significant in the agricultural sector as well. Prices received have risen significantly for citrus and vegetables, and costs have risen 8 to 12 percent during the past year far farm equipment and fertilizer.

On the other hand, retailers report flat prices due in part to heavy promotions. Prices for forest products have been flat to down during the past year, with newsprint prices down 10 to 15 percent from their year-earlier level. Aluminum and copper prices also are down. A surplus of premium wine "in the pipeline" is expected to lead to lower prices within the next two years.

Consumer Spending
Retailers report that consumer spending on general merchandise and apparel has been "generally good," which is somewhat better than expected. Inventories of soft goods reportedly have been well managed.

Car dealers report that customer traffic is down in February, particularly for used cars. Traffic and sales are off for both domestic and import dealers, but weakness is more pronounced on the domestic side. Sales are reported to be much stronger when incentives are available, and fall sharply when incentives are lifted.

Manufacturing
Reports suggest that conditions continue satisfactory in the manufacturing industries. Commercial aircraft orders show no signs of slowing, so production should remain at its current high level for the next several years. However, capacity constraints make further increases in production unlikely. Farm machinery dealers report strong sales for 1990 deliveries as a result of strong commodity and livestock sales.

Agriculture and Resource-Related Industries
Agricultural conditions are good in most parts of the District, with high prices and strong production. However, recent winter storms did not provide enough moisture to alleviate concern about water shortages in many parts of the West.

The price of gold has been fluctuating in a narrow range and remains at a level that makes production quite profitable. Consequently, production at District gold mines, particularly in Nevada, continues at high levels.

Restriction on timber-cutting from US Forest Service lands continues to make logs scarce and expensive. Some firms have closed mills and laid off workers because they are unable to produce profitably. Allowable cuttings are expected to be cut further in coming years.

Construction and Real Estate Residential construction and real estate activity continue healthy in most of the West, but conditions in nonresidential markets are more mixed. Northwestern cities are seeing strong building activity and relatively low vacancy rates in most markets. Some observers consider segments of the Los Angeles and San Francisco area markets to be somewhat overbuilt, although respondents indicate that problems are unlikely to be serious unless rates of absorption fall below their current levels. The office vacancy rate in Phoenix continues to rise, since the volume of new space coming on line is outpacing absorption. A nationwide retailer reports that bids for construction of new shopping facilities come in at very competitive prices in Phoenix, but that in California and Washington it is hard to get bidders, and current contract prices are about 10 to 12 percent higher than their year-earlier level.

Some builders and developers report that they are finding it more difficult to obtain financing since the thrift bailout began. The new limits on loans to one borrower are having a particularly significant effect on some builders. As a result, some projects that otherwise would have been built are being curtailed. One respondent notes that well-financed developers seem to be proceeding on the theory that their projects will be delivered when others are unable to find financing.

Financial Sector
Since implementation of the thrift bailout began, many lenders (both thrifts and banks) have tightened their lending standards and become less aggressive about courting new loans. However, several observers, from both inside and outside the financial industries, have not seen any changes in lending practices since the bailout began.