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Beige Book Report: San Francisco

June 22, 1994

Summary
While economic conditions are reported to be improving slowly an California and Hawaii, activity is strong in most other parts of the Twelfth District. Business leaders remain optimistic overall. Retail sales and tourism continue strong in many areas of the District. Manufacturing activity still is mixed, as weakness is reported in the aerospace industry while improvement is expected by some Silicon Valley firms. Livestock and dairy prices are soft. Construction and real estate activity generally remains strong, although home sales in some parts of the District are reported to have slowed in May in response to higher interest rates. Lending activity is rising, and banks are reported to be more aggressive in pursuing loans.

Business Sentiment
Twelfth District business leaders remain optimistic. Almost two- thirds of respondents continue to expect national growth to exceed 2 1/2 percent during the next four quarters. Respondents in Arizona and the intermountain states expect especially strong growth in their regions. However, only about two-fifths of business leaders now expect housing starts to improve during the next four quarters, down from more than one-half in April. Less than a third of respondents now expect the inflation rate to rise during the next four quarters, compared with over one-half in April.

Retail Trade and Services
Retail and service industry conditions remain strong in most parts of the District. Consumer durable sales are reported to be especially strong, with only a little evidence of slowing in response to higher interest rates. Prices for food and clothing show little increase. Auto sales in Idaho are reported up 25 percent in the first quarter of 1994 from the level of a year earlier, although sales in May slowed somewhat. Auto and light truck sales in the Pacific Northwest are reported strong, and sales are improving in parts of California. In Arizona, furniture and building materials sales through April are reported to be increasing at double-digit annual rates. Retail sales are reported to have picked up in California, especially for replacement furniture and appliances in the areas affected by the Northridge earthquake.

Tourism is strong in many parts of the District. Strong gains are reported in eastern Oregon. The Portland airport reports a 16 percent increase in passenger traffic in the first four months of the year from a year earlier. Tourism is reported to be rebounding in Hawaii, giving a boost to retail sales.

The demand for telecommunication services in California is reported to be strengthening slowly. Cellular subscriptions in the Pacific Northwest are reported to be increasing at a substantially accelerated pace. In Idaho, computer programmers are earning higher wages as the growth in demand outstrips the increase in supply.

Manufacturing
District manufacturing activity is reported mixed. Commercial aircraft activity in the District is reported stable as manufacturers await the certification of Boeing's new 777. One aircraft parts supplier noted a pickup in sales to Sweden, Indonesia, and Brazil. Defense-related aerospace industries remain weak in Southern California. In Silicon Valley, the demand for executives with marketing skills is reported to be increasing as companies begin to position themselves for future growth.

Agriculture and Resource-Related Industries
Agricultural conditions generally are good. Prices are high for field crops, like wheat, cotton, and rice, as well as for vegetables, including tomatoes, beans, and peas. Lower prices are expected for almonds, walnuts, and peaches. Milk prices are expected to fall sharply by July. High cattle inventories have pushed beef prices below production costs in some areas.

Oil prices have risen, but remain relatively low. The proposal to allow Alaskan crude oil to be exported may improve prices for oil producers in California's Central Valley by reducing supplies on the West Coast. Lumber and plywood prices are reported to be firming after falling between December 1993 and mid-May. Electricity prices in the Pacific Northwest are reported lower because of the additional water being spilled over the dams in the area to help the salmon run.

Real Estate and Construction
Real estate markets generally remain strong, but residential activity in many parts of the District slowed somewhat in May in response to rising interest rates. Home sales are reported to have slowed recently from the strong pace of March and April in the Pacific Northwest, parts of Northern California, and parts of Arizona, although the Tucson market remains strong. Sales in the intermountain states remain brisk, and May home sales in Hawaii are reported up 31 percent from April and up 67 percent from a year earlier. Home prices are reported up in the Pacific Northwest, Arizona, and in the intermountain states, and prices have stabilized in California's Central Valley. In Washington, office vacancy rates have fallen and rents are up. In San Francisco, vacancy rates remain high and rents are below the costs of maintaining the buildings in some instances.

Construction activity remains strong in many parts of the District. In Arizona and the intermountain states, both residential and commercial building is reported strong, with shortages of construction materials and skilled labor reported in these areas. Residential construction is reported flat in Northern California, improving in Southern California, and down from earlier levels in the Central Valley. In Salt Lake City, the airport is expanding and several new hotels are under construction. Interest rate increases are reported to have slowed the development of affordable housing in Southern California.

Financial Institutions
Banks in the District are reported to be pursuing loans more aggressively by easing lending criteria and offering more attractive terms. Loan demand remains strong in Idaho and Utah. In Arizona, loan demand is reported to be increasing, especially for consumer credit. In California, loan demand generally remains weak, but some strengthening is noted in Northern California and in business lending in Southern California. Loan demand also is reported to be showing signs of life in Hawaii, but delinquencies remain high. Throughout the District, interest rate increases are reported to have put an end to the refinancing boom.