Beige Book Report: San Francisco
March 9, 1994
Summary
California continues to lag behind the national economy, but much of
the rest of the Twelfth District shows signs of solid economic
growth. In California, weakness remains centered in the Los Angeles
area, reflecting the region's dependence on aerospace and defense,
while other regions of California are showing signs of bottoming out
or of modest improvement. The Northridge earthquake is seen as
causing a significant loss in quality of life in the Los Angeles
region, but also should provide some short-term stimulus to the
construction industry. In contrast to the California economy, Oregon
and Arizona are experiencing solid growth across several sectors and
the economies of the intermountain states continue to boom. Mixed
conditions are reported in Washington, where weakness in aerospace
is being offset by strength in other sectors and in the eastern part
of the state. Business sentiment in the Twelfth District is strong.
Business Sentiment
Sentiment among Twelfth District business leaders has improved
significantly in recent months. Almost all of the respondents expect
the real economy to expand during the next four quarters at a rate
at or above trend growth. This response is as strong as in January,
but is up from three-quarters in November, two-thirds in October,
and one-half in August. Furthermore, it remains the strongest such
response in the six-year history of this survey. Respondents from
California and western Washington, however, expect the pace of
growth in their regions to lag the nation.
Retail Trade and Services
Retail and services industry conditions are reported mixed in
California but good in most other District markets. Consumer
spending in certain parts of California is showing modest signs of
improvement, with the strongest conditions in the San Francisco Bay
Area and San Diego. Sales in Los Angeles and other parts of southern
California. however, remain weak. Much of the increase in spending
is reported in durable goods, especially autos and building
materials, while nondurables remain sluggish. In Utah, favorable
weather conditions helped sustain the pace of consumer buying
following a very strong holiday season. One national retailer
reports that overall sales are slightly better than in 1993. but
that cold weather in the East and the Northridge earthquake had a
sizeable negative effect in those areas. Another national retailer
reports that current sales are on par with three months ago, but
above a year earlier. Both national retailers report that
inventories are in line with sales.
In the telecommunications sector some shortage of cable supplies and broadcast equipment is reported. A contact in the newspaper industry reports some improvement in profits and ad volume at the end of 1993. The contact reports that newsprint is selling at a deep discount due to oversupply and relatively weak demand. Visitor industry conditions remain sluggish in Hawaii, but an increase in advance bookings for 1994 has led to expectations for improvement. In southern California, visitor industry conditions are reported improving despite the earthquake.
Manufacturing
District manufacturing activity is mixed, with weakness reported in
aerospace, defense, and wood products and strength reported in other
sectors. A contact in Oregon reports that wood products production
is flat due to timber supply shortages, but that other manufacturing
companies in the region have experienced steadily improving sales
and profits, particularly in durable goods. Another contact from
Oregon reports strength in truck and rail car manufacturing, and
that several expansions in the electronics sector are underway or
have been announced. A contact from Silicon Valley reports that
sales and production levels in the computer industry have improved
during the past three months and are much better than a year
earlier. Inventory levels in the industry have dropped and are
expected to continue falling over the next quarter.
Weakness in aerospace continues to act as a drag on the economies of southern California and western Washington, but contacts report that the pace of new announced layoffs has declined from a year earlier. The recent decision by Saudi Arabia to purchase United States manufactured aircraft will help preserve jobs in these regions.
Agriculture and Resource-Related Industries
District agricultural conditions are generally good. Several
contacts report that feed grain product prices are rising, with
dairies and feed lots paying more than in at least the last two
years. In contrast, cattle prices are expected to soften in 1994 due
to increased inventory. The oil industry in California's Kern county
is depressed, with oil prices at about the cost of extraction.
In the lumber industry, a contact reports that prices fell back from the January peak levels, but have stabilized about 15 percent over the 1993 average price level. Furthermore, with public timber supplies all but gone, the overall prices will stay above 1993 levels in 1994. Another contact reports that the threat of additional regulation of private lands has led to a rush in harvesting of private timber.
Construction and Real Estate
Both residential and nonresidential real estate and construction
markets are reported strong in most District markets outside of
California. Residential, commercial, and industrial construction is
reported strong in central and eastern Washington, with low interest
rates cited as a contributing factor. In Oregon, residential
construction activity is reported up from a strong 1993 and several
public infrastructure projects are underway. Boom conditions in
construction and real estate continue in the intermountain states.
Sluggish construction and real estate markets persist in California. A contact in northern California reports an improving mood in real estate markets, but no significant increase in activity. Sales of single family homes in southern California are only slightly higher from a year earlier. In the Central Valley. residential construction is slow, with no real pickup expected until late in 1994.
Contacts report that as a result of the Northridge earthquake, construction activity in the Los Angeles area will increase as repair and reconstruction efforts get underway The timing of the activity, however, is uncertain. One contact expects increased activity for architectural, engineering, and construction services for residential repairs over the next six to twelve months With respect to freeway construction, the state has announced a plan to complete much of the rebuilding by the end of this year. Some contacts, however, report that freeway construction could stretch well into 1995.
Financial Institutions
Some increased lending activity is reported in District financial
markets. A contact in eastern Washington reports somewhat stronger
commercial loan activity. In Oregon, loan demand is reported very
strong in all categories, but especially in real estate sales. A
contact from the California agricultural industry reports some
easing in bank lending policies. A contact in northern California
reports that small businesses find it very difficult to qualify for
conventional bank financing, despite public announcements by
commercial banks of their commitment to this market.