Beige Book Report: San Francisco
May 1, 1991
Summary
Economic conditions in the Twelfth District are characterized by
continued weakness in California offset partly by relatively strong
activity in other states. The outlook of western business leaders,
however, continues to improve. Materials prices are reported
unchanged or down slightly, and wage increases remain moderate.
Consumer spending continues to be sluggish, with little pick-up
noted since the end of the Gulf War. Agriculture is hindered by
drought conditions in some parts of the District. Construction and
real estate markets remain soft, but some improvement has appeared
in sales and prices in California. District financial institutions
report generally slow conditions, although lower interest rates have
spurred mortgage refinancing activity.
Business Sentiment
The economic expectations of western business leaders continued to
improve in April. Forty-seven percent of those sampled expect
improvement in housing starts in the coming four quarters, and a
similar percentage expect increased consumer spending. This is a
strong pick-up from the end of 1990 when over 90 percent of
respondents expected conditions to worsen in these sectors. Over 50
percent of business leaders continue to project improvement in the
foreign trade balance and inflation during the next four quarters.
Even with the more positive outlook, over 65 percent of respondents
still expect unemployment to increase and over 75 percent continue
to foresee GNP growth of less than 2.5 percent in the coming four
quarters.
Wages and Prices
Prices for many Twelfth District products and services are reported
to be unchanged or down slightly. Many reports suggest that declines
in fuel prices have helped to bring down overall prices. The Salt
Lake City and Boise area CPIs declined in the first quarter of 1991.
In Southern California, one report indicates that the price of
newsprint is 2 percent below last year's level. Wage increases
remain moderate. Most respondents report wage gains of only 3 to 4
percent, with minimal wage pressure on large employers currently
involved in labor negotiation. Increases of as much as 10 percent
continue to be reported for health care and tuition casts, however.
Retail Trade and Services
Consumer spending in the Twelfth District remains sluggish, with
only a few reports indicating a significant pick-up since the end of
the Gulf War. A food and drug retailer notes some improvement in
sales around Easter, especially outside of California. Auto sales
continue weak in the District, although showroom traffic is reported
to have increased steadily since the end of the war. Hawaii's
tourism industry is just beginning to recover from the sharp drop in
Japanese visitors earlier this year. Advertising at television
stations in the Pacific Northwest has increased since the end of the
war, but newspaper advertising volume in Southern California remains
off 20 percent.
Manufacturing
Manufacturing activity in the Twelfth District is relatively solid
outside of defense-related industries. Conditions in the aerospace
industry continue to be split, with commercial aerospace growing
while defense-related activity slows. In the Pacific Northwest,
shipyards are reporting solid growth. In Oregon, a helicopter supply
firm and a heavy equipment supplier are reported to he expecting
orders associated with the rebuilding of Kuwait. Export demand has
boosted sales of agricultural machinery to Mexico and Brazil.
Agriculture and Resource-Related Industries
Agricultural and resource industries in the Twelfth District
continue to report weak conditions. In California, the freeze in
late December cut citrus fruit production and exports in half and
destroyed many fruit and nut trees. Continued drought conditions in
California have caused farmers to cut back on acreage planted for
many crops, including a 15 to 20 percent drop in cotton acreage
planted in the San Joaquin Valley. Prices for many crops affected by
the drought are expected to rise, which will help to offset the
impact of the reduced plantings on cash receipts. Grain prices are
well below last year's levels. The cattle industry remains in good
shape, but higher commodity costs are reported to be tightening
profit margins.
Forest product industries in the District continue to be hampered by court actions which are halting federal timber sales. Some pick-up in lumber sales and prices is noted in recent months. Copper and aluminum prices have fallen recently.
Construction and Real Estate
Construction and real estate activity show signs of improvement in
California, and remain relatively healthy in the Pacific Northwest
and Intermountain areas. In California, reports suggest that home
prices are stabilizing. Moreover, sales activity has increased in
recent months. Single-family and condominium sales in Los Angeles
are reported to have doubled between February and March. Home prices
are rising moderately in the Pacific Northwest, Idaho, and Utah.
Commercial markets are weak in California as vacancy rates increased
in Los Angeles and remained high in other markets. Some reports
suggest that over-capacity will continue to depress commercial
construction in Los Angeles for two to five years. Conversely,
reports from Salt Lake City note low vacancy rates and rising rents.
Financial Institutions
Financial institutions in the Twelfth District report generally
sluggish conditions. In Southern California, loan demand remains
slow, while a Silicon Valley banker reports that loan demand is
strong, but deposit growth has fallen off. The decline in interest
rates has caused a flood of mortgage refinancing in the Pacific
Northwest. One report indicates that 35 to 40 percent of recent real
estate loan originations have been refinancings.