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Beige Book Report: San Francisco

June 20, 1990

Summary
Economic activity in the West continues at a healthy level. Western business leaders continue to anticipate relatively slow growth during the next twelve months, although they are slightly more optimistic than they were six weeks ago. Overall wage and price trends have changed little during recent weeks, with increases averaging around 4 or 5 percent. Conditions in the trade and service sectors continue healthy with little change reported. The pace of manufacturing activity varies widely within the District, with strength in aluminum, food products and commercial aircraft offset by weakness in defense industries and in some technology firms. Agricultural conditions in the West are satisfactory overall. The forest products industries face thinner margins. Most western real estate markets continue healthy. Recent reports confirm that lending standards have become more stringent in recent months, although the effect on creditworthy borrowers is not clear.

Business Sentiment
Western business leaders continue to anticipate relatively slow growth during the next twelve months, although they have become slightly more optimistic during the last six weeks. Three-quarters of respondents continue to expect that GNP growth will be positive but slower than 2 1/2 percent, while the proportion anticipating growth in excess of 3 percent rose from zero to four percent. Expectations regarding business investment, consumer spending, and the trade balance improved somewhat, while deterioration was noted in expectations regarding housing starts.

Wages and Prices
Overall wage and price trends have changed little during recent weeks, with increases in the 4 to 5 percent range remaining the "central tendency." Health care costs continue to rise at double- digit rates. One respondent who runs a machinery repair shop reports that, although his wage rates have not changed, he recently raised his shop rates by more than 5 percent to cover increased medical costs. Substantial upward price pressure also is reported for some drought-affected agricultural products, including alfalfa and cattle. A recent labor settlement in Hawaii calls for wage hikes averaging 7 percent per year for the next 5 years.

In contrast, some other products are seeing flat or lower prices. Prices for lumber and wood chips have fallen sharply in recent months, squeezing profits as log prices remain high. A car dealer reports that there is downward pressure on the prices of new cars. Many clothing retailers reportedly believe that the recent CPI increase in women's apparel prices is spurious, since competition in the industry makes it unlikely that higher prices can be maintained.

Trade and Services
Conditions in the trade and service sectors are generally unchanged. Retail sales continue healthy overall. Department stores, as well as food and drug retailers, report good conditions. The number of visitors to Hawaii has recovered following a hotel strike earlier in the spring. However, District auto sales continue weak, with no sign yet of the usual spring sales pickup.

Manufacturing
The pace of manufacturing activity varies widely within the District. Aluminum smelters are operating at capacity, while production of food products and plastics is reported to be strong in the Northwest. Commercial aircraft production is limited by capacity constraints, although production and delivery rates continue to rise as labor productivity improves further. Reports from the Northwest indicate that products associated with high-end construction such as wood-frame windows and specialty finishes are in strong demand.

Reports of flattening or declining activity continue to he concentrated in the defense and technology sectors. Several defense firms in the West have announced layoffs in recent weeks, and one large firm also has announced plans to move some of its operations from southern California to Georgia. The strength of commercial aviation, as well as possible increases in NASA funding, are the main bright spots for these firms. Overall conditions in technology- related sectors are relatively flat at present, but with wide variations by company and product line. One company supplying the computer industry reports very slow sales, but some firms in various segments of the electronics, computer, and software industries are doing very well.

Agriculture and Resource-Related Industries
Agricultural conditions in the West are satisfactory overall. Most farmers and ranchers have generated healthy profits in recent years, so their financial positions are relatively strong. Oregon vegetables are in strong demand by food processors, so plantings are up this year. Recent unseasonal rain storms in California provided enough water to increase allotments from their low drought levels. However, the storms also caused significant damage to some farmers' tree fruit crops.

Conditions in the forest products industries continue to deteriorate. More stringent restrictions on logging federal land have reduced the supply of logs and increased their price. At the same time, reduced home-building activity nationwide has weakened the price for finished lumber. The resulting profit squeeze has led several mills to lay off workers or close down entirely.

Construction and Real Estate
Conditions remain healthy in most western real estate markets. In California, the pace of home sales and the average amount of time on the market have returned to more "normal" levels. Average time on the market has risen in recent weeks in Washington. In both California and Washington. sales activity is stronger in the lower price ranges. Construction activity and the number of homes sold have risen by double-digit rates in Oregon, Idaho, and Utah. The average amount of time on the market has fallen significantly in these three states. Despite the widely publicized problems in Arizona's real estate markets, home prices have remained relatively stable, with small declines in some categories offset by small increases in others.

Financial Sector
Reports from inside and outside the financial industries confirm that lending standards have become more stringent in recent months. However, the effect on credit-worthy borrowers is not clear. Some lenders report that they are no longer financing "marginal" deals, suggesting that credit-worthy borrowers are still able to obtain funds. In Arizona, however, it is reported that only builders with excellent records and significant equity can borrow. Car dealers express growing concern about tightened lending criteria and withdrawals by some lenders from the "dealer indirect" business. A developer notes that the impact of more stringent lending criteria will likely be seen in a year or two, when less new space comes on the market.