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Beige Book Report: San Francisco

September 14, 1994

Summary
Economic conditions in the Twelfth District remain mixed. In California, activity has stabilized at a low level and shows signs of improvement in some areas. In Idaho, Nevada, and Utah, states which have experienced very rapid growth, activity remains high, but business leaders generally expect more moderate growth over the coming year. Currently, retail sales appear to be increasing, and demand for services is holding up. Manufacturing conditions continue to improve. Agricultural output is expected to be high this season. Real estate and construction activity remains strong overall, particularly outside California, but residential sales and construction have slowed recently in some areas. Loan demand remains strong in most of the District.

Business Sentiment
Twelfth District business leaders generally remain optimistic, but they expect some slowing in interest-sensitive sectors, such as housing and business investment. For the national economy, about half of the respondents still expect growth to exceed 2 1/2 percent during the next four quarters. For most of the district outside California, regional growth is expected to exceed the national average However, most California respondents still expect growth there to remain weaker than for the nation over the next four quarters.

Retail Trade and Services
Reports of some further improvement in retail and service sector conditions were received from most of the District. Retail sales increased moderately in California's Central Valley and Orange County, and sales also were up slightly in Los Angeles. In the Intermountain states, retail sales remained strong, especially for durable goods. New car sales in Idaho were up 12 percent in July from the level of a year earlier. In Idaho, Oregon, and Utah, auto dealers are concerned that slow deliveries of some 1995 model year cars might create shortages.

Tourism remains strong in most of the District. Car rental agencies in Salt Lake City rented their entire inventory for each of the first three weeks of August. In California, tourism has been strong, reportedly buoyed by an influx of foreign tourists who are taking advantage of the continuing weakness of the dollar.

Maritime industry business is stable. Some weakness in employment is reported in other service-providing industries; a California telecommunications utility reports further downsizing of employment, as rapid technological advances permit investment in better equipment at lower prices.

More broadly, labor demand appears to be accelerating a bit in the District, as indicated by reported increases in help-wanted advertising at newspapers. Outside of California, some labor markets show signs of tightness. An Oregon bank reports increased difficulty filling part-time positions. A multi-state construction firm reports that the shortage of skilled construction workers is worsening. A Utah retailer reports unusual increases in wages for entry-level jobs.

Manufacturing
Manufacturing conditions appear to be improving, although activity remains at low levels in some industries. One aerospace supplier reports that its backlog has increased in the past twelve months, but the backlog remains well below the level of two years ago. A computer manufacturer reports strong orders, partly in response to continued price cuts. An electronic components manufacturer reports that increasing wages have not been passed on to prices, as rapid productivity growth has held down unit labor costs. Aluminum manufacturers are reported to be operating at 85 to 90 percent capacity, with order lead times increasing and ingot prices up 36 percent from the beginning of the year. Pulp and paper product orders continue to strengthen; inventories are reported low and prices are up sharply.

Agriculture and Resource-Related Industries
Agricultural production appears to be increasing, but farm income is being held down by weak prices for some crops. Idaho's potato crop is reported excellent despite drought conditions. A bumper crop of grain is reported to be holding down prices, and the outlook for the corn crop is especially good. Beef production, as measured by the weight of cattle in feed lots, is strong. In California, prices for grapes and tree fruits have fallen.

Uncertainties created by domestic mining law reform are reported to be driving some mining exploration activity overseas. In Nevada, several mining exploration offices have closed.

Real Estate and Construction
In parts of the District, real estate and construction activity appears to have slowed a bit in recent months. In some areas, home sales are reported to have slowed recently from the rapid pace set earlier this year. In the Intermountain and Pacific Northwest states, reports suggest that the slowing of home sales is concentrated at the higher end of the market. A slowing of home sales also is reported for California's Central Valley. In Northern and Southern California, increases in existing home sales are reported, although overall prices are relatively flat.

Construction activity generally remains strong outside California. In Seattle, commercial occupancy rates are increasing, and there is a growing shortage of light industrial facilities. In southwestern Utah, Idaho, eastern Oregon, and eastern Washington, residential construction has remained particularly strong. Single-family home construction is reported to have slowed recently in a few areas, particularly Portland and Salt Lake City. In California, both residential and commercial construction activity remain low. In Southern California, rents for commercial real estate still are weak, but occupancy rates have improved somewhat.

Financial Institutions
District banking conditions generally are strong, with a slight slowdown in mortgage lending being softened by a shift towards adjustable-rate loans. Banks in California's Central Valley are reported to be doing well, with good deposit growth and modest loan growth. Credit supply conditions in Northern California are competitive. Outside California, commercial and consumer loan growth is reported rapid in Arizona, steady in Nevada, and leveling off in Utah.