Beige Book Report: San Francisco
March 17, 1999
Reports from contacts indicate strong performance from the Twelfth District economy in recent weeks. Sales of retail merchandise and services were robust in most areas of the District. Responses suggest a slight acceleration in District manufacturing activity, although demand in key sectors continues to be hampered by adverse trade conditions. District agricultural producers were hindered by weak export demand and poor weather. Conditions in real estate markets and the market for bank credit were robust overall, although slower real estate and construction activity was evident in some states. Upward price pressures were limited overall.
Business Sentiment
District respondents were optimistic about the expected performance
of the national economy and their respective regional economies
during the next four quarters. Virtually all of the respondents
expect growth in national GDP to equal or exceed its long-run
average pace. Slightly over half expect unemployment and inflation
to remain unchanged, although about 40 percent expect these measures
to rise. About half of the respondents expect better growth
performance in their regions than in the nation as a whole; this
percentage is up a bit from last fall. Moreover, the percentage of
respondents expecting deterioration in their region's outlook for
foreign trade has fallen substantially since last fall, although it
remains slightly above one-half.
Retail Trade and Services
Sales of retail merchandise and services were rapid. Unit sales of
retail merchandise were high in most areas, with substantial
discounting reported; specialty retailers did particularly well.
Sales of new automobiles and light trucks were vigorous, picking up
in late February following typically slow seasonal sales in
preceding weeks. Respondents in several areas noted strong sales
growth at supermarkets. Retail inventories generally were in
balance, with the key exception being short supplies of some new
trucks and sport utility vehicles. Prices of most products
reportedly were steady, with the exception of an increase in the
prices of retail pharmaceuticals. Sales of telecommunications
services, internet-related services, and computer software were
strong. Port traffic was very high on the West Coast, as East Asian
imports continued at a rapid pace while export traffic reportedly
has stabilized and possibly even picked up a bit.
Manufacturing
District manufacturing activity reportedly picked up a bit recently,
although demand in key sectors continues to be hampered by adverse
trade conditions. Unit sales of high-tech equipment were solid,
reportedly due in part to mild improvement in East Asian exports;
this has been accompanied by slower declines in the prices of
semiconductors and other computer components. A pickup in production
and sales of wood products was reported for the Pacific Northwest.
Production activity and sales were very strong for manufacturers of
communications equipment, automobiles, and pharmaceuticals. In
contrast, Boeing has seen cancellation of aircraft orders from China
and other East Asian countries; reduction of the company's workforce
has proceeded, and Boeing's suppliers are facing reduced demand due
to the company's production cuts. In the machine tool, steel, and
garment manufacturing industries, respondents noted stiff
competition from low-priced imports, accompanied by shrinking
employment in each industry and rising inventories in the latter
two.
Agriculture and Resource-related Industries
District agricultural and natural resource suppliers faced somewhat
weak conditions. Citrus growers in California's Central Valley
suffered severe crop damage due to the freeze in late December. The
associated losses were large in dollar terms, which has hurt the
area's income, employment, and retail sales performance. Throughout
the District, prices remained very low for key agricultural
commodities, especially wheat. District beef sold well, due to
strong exports to Mexico and a pickup in exports to Japan. In the
extraction industries, low prices for oil and natural gas have
reduced profits and employment in some areas, most notably Alaska,
where oil companies reportedly have cut budgets by 25 to 30 percent.
Real Estate and Construction
Activity in the District real estate and construction sector was
robust overall, although slowing was evident in some states. Home
construction, sales, and price increases were rapid in most parts of
California. A San Francisco respondent reported that lease rates for
commercial space in the San Francisco Bay Area rose further,
reaching levels equal to the historical highs of the late 1980s. In
Hawaii, sales of existing residential properties reportedly were the
only source of vigor in the otherwise moribund state economy. In
other parts of the District, real estate market and construction
activity has slowed a bit, easing earlier capacity pressure. The
rate of increase in the cost of housing reportedly has slowed in
Idaho, Utah, and Nevada. Respondents also reported that the cost of
construction labor has fallen from previously elevated levels in
Utah, and construction activity in general fell further in Oregon.
Financial Institutions
Demand for loans was strong in most areas and was met by vigorous
competition among banks for loan applicants. Respondents in several
areas of the District noted very competitive pricing and
underwriting terms for loans. The pace of lending was rapid
throughout California, although in the state's Central Valley bank
business reportedly was reduced by economic difficulties associated
with damage to the area's citrus crop. The only reported instance of
deteriorating credit quality was from the Oregon coast, where loan
delinquencies increased.