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San Francisco: March 1995

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Beige Book Report: San Francisco

March 15, 1995

Summary
Economic activity in he Twelfth District continues to strengthen modestly, although there are reports of slowing in some sectors. The strengthening partly reflects some pick-up in California's still moderate recovery. Activity continues to accelerate in Oregon, but growth is easing from high levels in the intermountain states. On a sectoral basis, retail sales growth slowed in January and early February, while service sector firms report generally strong demand and some upward pressure on input prices. Computer, machinery, and paper manufacturers report strong domestic and foreign demand, while lumber and aerospace firms show continued weakness. Agricultural conditions generally are good, with strong exports to Asia offsetting declining sales to Mexico. Residential real estate activity has slowed noticeably in most areas, but commercial markets remain strong in the intermountain states and the Pacific Northwest. District banks report slow deposit growth, but generally strong loan demand.

Business Sentiment
Twelfth District business leaders expect national economic growth to moderate over to next year. About three-fifths of survey respondents project national output growth to slow to the long-run historical average pace, after above-average growth last year. One-third of business leaders expect an increase in the unemployment rate during to next year, a marked change from he last report when few projected a worsening in unemployment. Business leaders expect continued strong growth in District exports to Asia and Europe, but weakness in sales to Canada and Mexico.

Retail Trade and Services
District retailers report some slowing of sales growth in January and early February. Food store sales were slow and prices have yet to rise despite large increases in packaging costs. Consumer soft good sales also were reported slow, with prices flat or declining. New car sales in Idaho in December and January were reported down 9 percent from a year earlier. Dealers have increased the use of rebates and other incentives to bolster sales. Retailers close to the Mexican border near San Diego report sharp declines in sales since the devaluation of the Mexican peso. In Idaho and Utah, reports indicate that entry-level retail workers are increasingly difficult to hire, and wage have risen 3 to 3 1/2 percent.

Many District service providers report continued strong demand. Software and communication firms in Washington continue to experience strong growth, but note some upward pressure on input prices. Newspapers report excellent demand, but newsprint prices are sharply higher. Lower health care premiums and slower growth in wages for health care workers are reported in the Pacific Northwest. Hotel occupancy remains above 80 percent in Salt Lake City, pushing room rates up 6 to 8 percent. In Southern California, hotel occupancy and room rates are beginning to increase slowly.

Manufacturing
Manufacturing activity remains mixed. Tool and machinery manufacturers report continued strong domestic and export demand, with prices rising for heavy construction equipment. Pulp and paper product orders and prices have increased. Newsprint manufacturers are operating at high levels of capacity utilization. Conversely, lumber sales continue to slow and prices are well below year earlier levels. Aerospace manufacturing remains weak, as lower production at Boeing is expected to lead to layoffs at its suppliers in the region this year. An additional 3,700 layoffs are expected at the Hanford nuclear facility in Washington by September 1995.

Agriculture and Resource-Related Industries
Agricultural and resource industry conditions generally are good. Total District agricultural exports continue to grow, as rising exports to Asia offset slowing sales to Mexico. Arizona and California cotton producers report high production, prices, and export sales. Washington apple exports are reaching Japan for the first time, but sales to Mexico have slowed substantially. Cattle prices have risen, but reports from Arizona indicate that beef exports to Mexico have virtually stopped. District farmers report lower feed grain prices and significantly improved water availability, but pesticide and chemical prices have increased. Farm worker wages are reported flat in most areas.

Timber exports to Japan have increased in response to demand from the Kobe earthquake rebuilding effort. Electricity prices in the Pacific Northwest are expected to remain low through the summer because of abundant hydroelectric supplies.

Real Estate and Construction
Residential home sales and construction activity are reported to have slowed in most areas. Even with the recent slowing, the level of activity remains high in Arizona, Idaho, Nevada, Oregon, and Utah; upward pressure on construction materials prices is reported in those markets. In California, home sales are reported to have slowed from 1994's pace, but sales and construction activity are expected to strengthen during the remainder of 1995.

Commercial markets are strong outside of California. In Salt Lake City, low office, industrial, and retail vacancy rates are spurring increases in rents and building activity. In downtown Portland, Oregon, office vacancy rates are the lowest in the nation, and rents are reported rising. Likewise, commercial and industrial office vacancy rates are falling and rents are rising in the Puget Sound area. Commercial office vacancy rates remain high in Los Angeles and San Francisco, and little new construction is reported, but some improvement in activity is expected during 1995.

Financial Institutions
Banks in most parts of the District report slower deposit growth, but generally good loan demand. Consumer and business loan demand is reported strong in Southern California. In Northern California, loan demand is weaker, with competitive pressures on loan pricing and underwriting criteria. Some reports from Oregon indicate a recent slowing in loan demand. Upward pressure on wages are reported for entry-level workers at Oregon banks. Loan demand and quality remain good in Utah.