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San Francisco: March 1994

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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.