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Beige Book Report: San Francisco

March 18, 1998

The Twelfth District continued its vigorous economic expansion, though with indications of moderation in some areas. The pace of retail sales was moderate. Both the manufacturing and service sectors experienced continued strong growth, although the restraining effect of the East Asian economic turmoil was evident in several sectors. The District banking and real estate sectors remained healthy overall, with the reports being more positive for California than for other parts of the District. Many respondents noted difficulties finding skilled and entry-level workers, and some reported larger wage increases than in the recent past.

Business Sentiment
Respondents remain optimistic regarding prospects for the national economy and their respective local economies. More than sixty percent of them expect national GDP to expand at its long-run trend and the current rates of unemployment and inflation to remain unchanged over the next year. Nearly three-quarters of the respondents expect more rapid growth in their regions than in the nation, although this percentage has declined during the last six months. Despite respondents' generally optimistic views, the percentage expecting deterioration in their region's foreign trade balance increased sharply, to nearly three-fourths, over the past six months.

Retail Trade and Services
The pace of retail sales was moderate in recent weeks. A respondent from a large supermarket chain reported flat sales in Idaho, Nevada, and Utah. Sales were somewhat slow at department stores in Southern California and other areas, and several respondents noted weak demand and rising inventories for apparel. An automobile dealer in Utah reported that vehicle sales were weak during February.

Demand for most services, however, continued to expand very rapidly. Sales were particularly brisk for providers of telecommunications and cable television services. Respondents also noted rising demand for business and professional services up and down the West Coast. Deterioration in the trade balance with East Asia was reflected in reduced exports and increased imports through the ports of Los Angeles, Seattle, and Portland, with some decline in the total flow. Reports from Utah and Oregon indicated reduced tourist activity, and Hawaii's tourism sector has been hit hard by a drop in the number of visitors from East Asia. Southern California contacts reported that tourist business there has been affected somewhat by heavy rains but remains strong overall. Respondents in most areas noted ongoing shortages of information technology workers.

Manufacturing
Production and employment expanded further among manufacturing establishments, particularly those producing durable goods. The strongest demand conditions were reported for aluminum, for which market prices have risen about 20 percent recently. Orders for some types of machine tools rose, though the extent of backlogs varied substantially across companies in this sector. Boeing expanded its aircraft production further. The company still faces order backlogs, although order delays by East Asian airlines have grown. Respondents in many areas- particularly the Pacific Northwest-reported that the East Asian economic turmoil reduced District sales of metals, lumber, pulp and paper, processed food, athletic shoes, and some high-tech products. Although production bottlenecks were limited overall, many respondents noted difficulties finding and retaining skilled computer and craft workers.

Agriculture and Resource-Related Industries
The usual seasonal lull in the agricultural sector was exacerbated by adverse weather conditions and reduced demand from East Asia. Persistent severe rainstorms caused early crop problems in California, although their impact on the complete growing cycle remains uncertain. Declining demand from East Asian customers has reduced sales of District resource and agricultural products, particularly those from the Pacific Northwest. For example, both Alaskan salmon exports and Washington apple exports were down substantially compared to last year, and District wheat exports and prices were low. District beef and pork exports to East Asia also were down substantially, although this was partially offset by increased sales to Mexico.

Real Estate and Construction
Respondents reported enhanced real estate market and construction activity in California but reduced activity in some other areas. In California, construction activity and prices rose both in the residential and nonresidential sectors. In contrast, housing starts declined and expansion in nonresidential construction contracts reportedly slowed in Oregon. Housing starts also slowed in Utah, where most sales prices reportedly fell short of list prices. Nonetheless, the level of building activity in the District remained high, and respondents noted shortages of skilled construction workers in many areas, particularly Oregon, Nevada, and Utah.

Financial Institutions
Conditions at District banks were healthy overall, although industry trends appear to be more positive in California than elsewhere in the District. Loan activity remained high in most areas. Several respondents from the Pacific Northwest noted erosion of credit quality and use of less stringent underwriting standards. Loan demand and availability reportedly were high throughout California, with one respondent noting an easing of underwriting standards in the San Francisco Bay Area. Due to ongoing economic slack, two major Hawaiian banks announced large layoffs. Banks in most other areas reported hiring and retention problems, both for skilled categories such as loan officers and entry-level positions such as tellers.