Beige Book Report: San Francisco
September 19, 1990
Summary
Economic activity in the West is growing at a modest pace, following
some slowing in recent months. Since the Iraqi invasion of Kuwait,
western business leaders' expectations of future national economic
growth have weakened sharply. Price inflation remains around 5
percent, with the exception of the recent large increase in oil
prices. Retail activity appears to be softening in most parts of the
District. Manufacturing conditions are mixed, with strength in
commercial aircraft and aluminum offset by weakness in some other
sectors. The situation in the Middle East has shaken up energy-
related industries, while agricultural conditions remain generally
strong. Real estate and construction activity continue to cool off
in the District's coastal areas, while most inland areas remain
strong. Financial institutions note recent weakening in lending
activity.
Business Sentiment
Western business leaders expectations of future economic activity
have deteriorated significantly since Iraq's invasion of Kuwait. 39
percent now expect a national recession during the next 12 months,
compared with only 4 percent six weeks ago, and only 5 percent of
respondents now anticipate that growth will be as strong as 2 1/2
percent, compared with 30 percent last time. Most respondents
indicate that the Iraqi invasion has not yet caused changes in their
business plans, beyond a renewed interest in energy conservation.
One firm, however, has put new Middle East business on hold while a
few others are approaching future capital investments with
increasing caution.
Wages and Prices
Price inflation remains around 5 percent, with the exception of the
recent large increase in oil prices. Gasoline prices are up sharply
throughout the District. Jet airplane fuel prices in Seattle are up
62 percent since the end of July.
Most respondents indicate that wages have risen by about 3 to 5 percent from their year-earlier levels. However, the cost of benefits continues to rise at a faster pace, with rising health care costs cited as the major factor.
Retail Trade
Retail activity appears to be softening in most parts of the
District. Auto Sales have slowed and auto manufacturers continue to
fatten rebates to prevent sales from eroding further. Sales of other
durable goods, like farm machinery and home furnishings, also are
reported to have weakened. Sales of nondurable goods are reported to
be softening. A retailer in Southern California indicates that,
excluding the effects of promotions, sales fell 5 to 6 percent in
August from a year ago. Another West Coast retailer reports that,
since July, sales have been up just 3 percent from a year ago, well
off the 10 percent growth seen in earlier months. However, reports
indicate that sales gains were considerably more robust in
California's Central Valley, Alaska, Hawaii, and Utah.
Manufacturing
Manufacturing activity in the District is reported to be mixed
overall. Aluminum manufacturers continue to run at about 90 percent
of capacity, and one observer suggests that an increase in demand
for aluminum products may occur as the Defense Department builds up
its inventory of spare parts. Newsprint manufacturers continue to do
well, but the packaging and paperboard side of the industry has
slowed significantly since last year. Orders for commercial aircraft
have been relatively stable for the past three months, and most
manufacturers continue to face multi-year backlogs. A paint and
coatings manufacturer reports that some of his markets are starting
to show signs of slowing, which represents a deterioration from last
year when all markets were accelerating.
Agriculture and Resource-Related Industries
Conditions in agriculture remain good overall. Agricultural prices
continue strong for most crops except wheat and some feed grains,
and livestock markets have held up better than expected.
California's almond crop will be the largest ever, but the resulting
downward price pressure may put prices below production costs. In
the lumber industry, weaker sales are depressing prices and
increasing inventories.
Interest in new oil drilling activity has increased in some areas of the District since the Iraqi invasion of Kuwait. One natural gas firm plans to increase capital expenditures by 65 percent this year over last year's level.
Construction and Real Estate
Real estate activity continues to cool in the District's coastal
areas, but conditions inland remain strong. Home price appreciation
in the Seattle area is slowing and the inventory of unsold homes is
growing. Commercial leasing activity in southern California
continues at a good pace, but net effective rents have declined 4 to
6 percent from last year as a result of persistently high vacancy
rates. Home prices in Bakersfield and Sacramento continue to rise,
but reports suggest that price increases may be slowing from their
earlier phenomenal paces. Construction activity is slowing in many
parts of the West.
Financial Sector
Financial institutions report generally good conditions, despite
weakness in lending activity. One southern Californian bank reports
declining deposit levels while another indicates that consumer,
commercial, and construction loan volumes have weakened in recent
weeks. One banker reports that loan activity continues to grow in
Oregon and Washington, but at half of last year's pace.