Beige Book Report: San Francisco
June 19, 1991
Economic conditions in much of the Twelfth District are weak, although some bright spots have emerged recently. Most notably, lower interest rates have stimulated real estate sales activity in many parts of the District. In addition, some improvement in soft- goods sales has been noted in recent weeks. Manufacturing activity continues slow, with most firms taking a cautious approach toward investment plans. Agricultural conditions are mixed in the West, with many areas affected by drought and low commodity prices. Financial institutions continue to report weak growth in loan volume, although lower interest rates have spurred mortgage refinancing activity.
Business Sentiment
The economic outlook of Twelfth District business leaders continued
to improve in June. Three quarters of respondents still expect GNP
to grow less than 2.5 percent over the next four quarters, but the
proportion of respondents anticipating slow growth has fallen
steadily since the end of 1990. Expectations improved considerably
for investment and spending. Eighty percent of western business
leaders now foresee business investment and consumer spending
improving or staying the same during the next four quarters. The
outlook for housing starts also improved, with 70 percent of
respondents projecting better housing starts over the next four
quarters.
Wages and Prices
Wage and price increases in the Twelfth District remain modest.
First-quarter consumer prices were only 2.7 percent above their
year-earlier level in Phoenix, while consumer prices fell 1.6
percent during the last six months in Salt Lake City. Price
increases for retail goods remain moderate. Food prices have risen
at close to a 3 percent rate in recent months, and are expected to
rise less than 3 percent for the remainder of the year. A health-
care industry executive expects the rate of increase in health care
costs to moderate slightly in 1991, but still to exceed the general
inflation rate. Most wage increases still are reported in the 3 to 5
percent range.
Retail Trade and Services
Conditions in the Twelfth District's retail sector are mixed. Two
soft-goods retailers report that retail sales have picked up in
recent weeks, prompting optimism for a reasonably good second half
of 1991. Retail inventories remain tightly controlled. Many reports
suggest that lower interest rates have not yet bolstered consumer
durable goods sales. New-car sales still are slow in much of the
West, although used cars are reported to be selling well.
Advertising volume continues to decline for both television and
newspapers.
Manufacturing
Twelfth District manufacturing activity is reported slow in many
areas. Most firms are taking a cautious approach toward investment
plans because of continued economic uncertainty. However, a survey
of Puget Sound area businesses suggests that 67 percent anticipate
increased capital spending during the next twelve months, and Boeing
is undertaking a major expansion of its Puget Sound area facilities.
Aluminum manufacturers report excess capacity and weak demand,
pushing prices down 35 to 40 percent. Farm machinery sales are slow
in Idaho because of drought and weak commodity prices. Conversely,
heavy construction equipment sales are reported up over a year ago
in some parts of the District.
Agriculture and Resource-Related Industries
Agricultural and resource industry conditions are mixed in the West.
Agriculture in California is in good shape outside of the areas hit
hardest by the drought and freeze. Dairy farmers are facing
difficult conditions because of low milk prices. Cattle prices
remain at record levels, which has caused increased costs and
reduced profits for feedlot operators. Wood product prices increased
in recent weeks, while log supplies remain tight as a result of
strict restrictions on timber harvests in federal forests.
Construction and Real Estate
Construction and real estate activity in the West is reported to
have improved in recent months. Increased housing sales are
attributed at least in part to lower interest rates. Increased
residential activity was reported throughout California. Sales of
existing homes in California rose 12 percent between March and April
for the third consecutive monthly increase. The median home price
rose 1.7 percent during the month, to a new record high at a level
4.9 percent above its year-earlier level. In Oregon, the average
home sales price is reported up 22 percent from last year.
Commercial activity is reported to be stable to weak. In Los
Angeles, leasing is down 19 percent in the first four months of 1991
compared to the same period in 1990, despite improvement since the
beginning of the year. Several new commercial construction projects
have started in Southern California. Overall construction activity
is strong in Idaho and Utah.
Financial Institutions
Twelfth District financial institutions report relatively stable
conditions. Loan growth remains weak in most areas, but lower
interest rates are stimulating increased demand for mortgage
refinancing. However, one California banker reports that some of the
increased refinancing activity is substituting for home-equity
loans. In California, credit card balances are reported to be
increasing, while in Utah, consumer delinquencies have improved in
recent months. Some banks report high liquidity as a result of
strong growth in money market deposit accounts.