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Beige Book Report: San Francisco

December 5, 1990

Economic growth in the West remains sluggish, and western business leaders' expectations about the national economy continue to deteriorate. Reports suggest that price increases may have moderated in recent weeks. Retail trade activity in the West is mixed, with wide variations by region. Activity in most manufacturing industries is reported to be flat to down front a year ago. Agriculture is one of the stronger sectors in the District, with strong prices and good yields. Lumber orders are down, while oil producers are enjoying the current high level of prices. Construction and real estate activity are down in most parts of the West, but several inland regions report continued strength. While conditions in Twelfth District financial institutions remain generally healthy, some California banks report further softening in major markets.

Business Sentiment
Western business leaders' expectations about the national economy continue to deteriorate. According to the most recent survey, 72 percent of respondents expect a recession during the next year, compared with 67 percent five weeks earlier and 4 percent at the end of July. The remainder of respondents anticipate that real GNP will grow at a pace slower than 2 1/2 to 3 percent. Weakness is anticipated in the home building, consumer spending, and business investment sectors, with more than 90 percent of respondents expecting softening in each of these sectors. In contrast, respondents are evenly split between those expecting the trade balance to improve and those expecting it to worsen.

Wages and Prices
Reports suggest that price increases may have moderated in recent weeks. While some petroleum based products, including plastic products, have seen their prices rise during the past six weeks, users of other petroleum products, such as jet fuel, note recent decline since the sharp run-ups immediately following the invasion of Kuwait. Reported price increases for labor and for most other products continue to cluster in the 3 to 5 percent range. However, auto dealers and department store retailers report that consumer resistance is holding their prices down. One retailer notes that wholesale prices for soft goods appear to be declining, and these reduction should eventually be passed on to the consumer. Another retailer expects prices to fall during the holiday season as stores resort to promotional pricing to attract shoppers.

Retail Trade and Services
According to current reports, retail trade activity in the West is mixed. Several respondents report weakness, including an auto dealer and a department store executive. Sales are stronger in the Pacific Northwest and inter-mountain areas than they are in other parts of the West Moreover, a Sacramento respondent notes that some retailers in that area are experiencing stronger sales than they did a year ago, much to their surprise.

While one retailer reports a slight increase in inventories, another notes that inventories are in "surprisingly good shape" due to cautious ordering by retailers. No significant changes in the composition of retail orders, in terms of domestic versus imported products, were reported.

Manufacturing
Most respondents familiar with manufacturing industries report that activity is flat to down compared with a year ago. Inventories, however, are generally under control. One respondent reports that electronics industry orders are being placed with much shorter lead times as customers try to hold down inventory costs. While the number of commercial aircraft manufactured remains flat, orders continue to pour in and the order backlog continues to lengthen. This year, 90 percent of one aircraft manufacturers' orders were from overseas, compared to an average of 60 percent during the previous two years. A smaller aircraft manufacturer, however, reports that the overall number of orders at his company is about the same as it was last year, and that there has been no appreciable change in the composition of domestic versus foreign orders.

Agriculture and Resource-Related Industries
Agriculture is one of the stronger sectors in the District, with strong prices and good yields for most products. Beef producers are enjoying high prices, and beef exports to the Pacific Rim have picked up again after slowing this summer. In California, farmers and ranchers are increasingly concerned about the possibility of a fifth drought year. This concern, along with worries about trade negotiation and the general economy, have led to increased caution among some farmers.

Lumber orders are down from a quarter ago and from a year ago. Many mills in the Northwest are cutting back production due to this lack of demand.

Oil producers are enjoying the current high level of prices. In Kern County, California, oil companies are spending money to enhance their wells, but long-term price uncertainty is keeping them from doing much exploration.

Construction and Real Estate
Construction activity is down in most parts of the West, particularly in the office and commercial sectors. The weakness is attributed to an abundant supply of space in most markets, coupled with resulting caution on the part of lenders. Reports suggest that construction activity in the Seattle area may be growing more slowly or declining, but a utility company continues to experience robust growth in its number of residential hookups. Some parts of the District continue to experience strong residential construction activity, including Bakersfield and Fresno in California's central valley, and parts of Idaho, Utah, and Oregon.

Real estate activity, as measured by the number of sales, property values, and rents, continues to weaken in most parts of the West. A southern California developer reports that new leases on office space in some areas are priced 10 to 15 percent below their peak levels. This developer also reports that few commercial properties are being sold, but estimates that the values of the well-leased commercial properties that are changing hands have fallen by as much as 10 to 15 percent as well. At the same time, in California's central valley, the Pacific Northwest, and the inter-mountain states, residential property values continue to exceed their year- earlier levels. Even in markets that are generally lackluster, low- priced homes continue to sell relatively briskly.

Financial Sector
While conditions in Twelfth District financial institutions remain generally healthy, some California banks report further softening in major markets. One California banker, for example, reports that business loan demand is flat and consumer loan demand has softened considerably during the past two to three months. At the same time, bankers in Oregon, Utah, Idaho, Hawaii, and central California report strong or improved loan demand.