Beige Book Report: San Francisco
January 21, 1998
Reports from Beige Book contacts indicate favorable economic conditions
among 12th District states in the final months of 1997 and suggest
a positive, although more tempered, outlook among respondents for
1998. Retailers reported that holiday sales, though stronger than
last year, were lower than expected, prompting considerable post-season
discounting. Respondents throughout the service sector reported
healthy gains in recent weeks, and shipping and trucking contacts
noted easing of recent bottlenecks associated with the Union Pacific
Railroad merger. Manufacturers reported healthy activity, but noted
declines in exports to East Asian countries. Developments in East
Asia also have reduced demand
for many District agricultural products. Steady demand for
commercial real estate kept construction activity strong in most
of the District, despite a slowdown in many housing markets. District
financial conditions remained healthy, and competition for quality
borrowers continued to be intense.
Business Sentiment
District respondents expect solid performance of the national
economy and their respective regional economies. Most respondents
expect national GDP growth to slow to its long-run average pace,
leaving the national unemployment rate near its current level. A
majority of respondents expect inflation to remain constant over
the next 12 months, although a growing fraction anticipate a slight
decline in inflation. With regard to regional conditions, over three-quarters
of the respondents expect growth in their area to outpace national
growth in the coming year. Recent disruptions in East Asia have
affected export expectations in the District-more
than 80 percent of District respondents expect a decline in foreign
exports from their regions.
Retail Trade and Services
Respondents in most areas of the District characterized holiday
retail sales as better than last year but lower than expected. High-
end gifts, such as jewelry and branded apparel, reportedly posted
the strongest sales, requiring little pre-Christmas discounting
to attract buyers. In contrast, retail contacts reported disappointing
sales of inexpensive and moderately priced clothing and personal
electronic items, despite early heavy discounting. Overall, slower
than expected holiday sales, particularly at department stores and
discount chains, reportedly have left many retailers with unwanted
inventories that are being cleared away through deep price cuts.
Service industry respondents in most of the District reported good
gains during the recent survey period. Respondents from Northern
California and the Pacific Northwest reported healthy demand for
business services, including consulting and advertising. Tourism-
related airport traffic and hotel occupancy rates increased in several
areas of the District. In Portland, air passenger traffic reportedly
was at record levels. In San Diego, hotel occupancy rates reportedly
reached a decade high over the past few months. The news was not
as good in Utah and Hawaii. In Utah, a lack of snow has
slowed the flow of ski-bound tourists; in Hawaii, recent
developments in East Asia have significantly depressed East-bound
visitor traffic, prompting many airlines to reduce the number of
scheduled flights to the state. Port traffic throughout the District
reportedly was strong. Inbound traffic from East Asia has offset
declines in outbound vessels carrying products to East Asia. Respondents
in the shipping industry also indicated that the bottlenecks associated
with the Union Pacific Railroad have subsided slightly in recent
weeks.
Manufacturing
District manufacturing reports generally were positive, although
contacts noted that developments in East Asia have reduced exports
and tempered growth in some areas and industries. In the Pacific
Northwest, food processors and lumber and wood product manufacturers
reportedly have experienced substantial declines in exports to East
Asia, prompting some companies to postpone expansion plans until
the region stabilizes. Boeing also has felt the effects of East
Asia; public statements from Boeing indicate a slowdown in the growth
of aircraft orders and requests for delivery delays from East Asian
countries. However, given the backlog of orders at Boeing, no decline
in production is expected this year. In other areas of the District,
contacts reported declines in shipments of primary and secondary
metals to East Asian countries and slowing of orders for telecommunications
equipment.
Agriculture and Resource-Related Industries
Reports on District agricultural conditions and resource-related
industries were mixed. Falling gold prices resulted in the recent
shut down of operations at a number of District mines. The cattle
industry was beset by herd losses due to unfavorable weather and
grazing conditions, particularly in the Intermountain states. Demand
for many agricultural commodities slowed in recent weeks as East
Asian countries either cancelled orders or failed to secure appropriate
lines of credit for purchase. On the bright side, reports indicate
that the Union Pacific railway problems have begun to ease, clearing
the way for delivery of inputs that are necessary
for the next growing cycle.
Real Estate and Construction
Commercial real estate activity continued to increase in most areas
of the District, keeping District construction activity at high
levels despite a slowdown in many housing markets. Respondents in
many areas of the District outside of California noted declines
in new housing starts and slowing sales of both new and existing
homes. However, commercial real estate and construction activity
in these areas remains strong and has kept demand high for contractors,
subcontractors, and materials.
Financial Institutions
Twelfth District banking conditions continued to be healthy.
Respondents reported that bank capital and liquidity were in ample
supply and competition for loans remained intense, with quality
borrowers receiving excellent terms and rates. Respondents noted
that low interest rates are boosting loan demand and encouraging
refinancing on all types of real estate. Throughout the industry,
shortages of qualified workers continued to be a primary concern,
and wage and salary pressures remained high.