Beige Book Report: San Francisco
March 11, 1980
The economy of the Twelfth District exhibits few signs of a recession, but the influence of high interest rates has been widely felt in the housing industry and rapidly rising prices are a universal phenomenon. Consumer spending is continuing at a strong pace despite high prices; this behavior is believed by many to reflect a pessimistic inflation psychology. Labor demand in defense-related industries and in high-technology industries is contributing continued strength to employment figures. Loan demand remained strong at most banks and S&L's last month, but there is widespread concern about the conversion of savings deposits into money market accounts and the consequent effects on the cost of funds. With the exception of activities affected by the recent flooding in California, the agricultural sector is reported to be in good shape.
The housing sector in the District has been affected significantly by the recent runup in market interest rates. With the exception of Southern California, most residential real estate markets are reported to be very slow, with considerably reduced resale and construction activity. The level of activity is very sensitive to the prevailing mortgage rate; several builders in California were reported to have started up again in early January as mortgage rates began to moderate. As rates resumed their rise, however, housing starts were depressed once again. Resales and construction in Southern California (particularly the San Fernando Valley and Orange County areas) appear to have suffered somewhat less than the district as a whole. In Salt Lake City, where the inventory of unsold homes has fallen about 25 percent, some anticipate a housing shortage in the spring.
Consumer spending continues to buoy the economy of the western region. Although sales of American cars in January were down about 15 percent over last year, there are waiting lists in many areas for the smaller domestic and foreign models. In Southern California, the aggregate volume of retail sales is up about 20 percent with certain submarkets posting even larger gains. The demand for durable goods is mixed, with strong demand reported in Central California, but weak demand in Oregon and Idaho, for example. There is widespread agreement that a "spend it now" attitude is responsible for the pattern of high levels of consumption spending and low savings rates.
The special mix of industry in the District is largely insulating the region's economy from the deleterious impact of the weak residential construction sector. Portland's economy, for example, has experienced a 900 percent increase in personal income attributed to electronics and light manufacturing firms since 1973 and these sectors remain strong today. The demand for the region's products in the Pacific Rim markets is also quite strong. Strength in the foreign demand for lumber, for example, has helped to offset weakened demand from the residential construction sector. Predictions of increased demand for defense-related products have made the markets for skilled labor (such as sheet-metal workers and computer processing personnel) very tight. In fact, there is some concern that the West Coast aerospace industry may have too little excess capacity to be utilized for additional production. A major aircraft manufacturer, however, argues that it has the ability to considerably expand defense-related production. Moreover, weak profits in the commercial airline industry have caused some carriers to not exercise their option to buy new aircraft and this may create some spare capacity in the aerospace industry.
High interest rates are causing concern in several sectors of the economy. Financial institutions continue to experience conversion of traditional consumer accounts into money market certificates, raising concerns over the cost of funds. Loan demand generally remains strong, however, in most categories including consumer credit except where loan qualification is a problem and in those areas where usury limits have curtailed the flow of credit. A bank in Washington, for example, reports that credit card lending is only about 25 percent of its normal level because of institutions' reaction to the 12 percent usury limit that prevails in that state. The severe price declines in the bond market may have encouraged the increased use of banks as a source of corporate credit. Commercial and industrial loan quality is reported to be deteriorating, however. High interest rates are causing particular problems for frozen food processors, automobile dealers, and others for whom inventories are an important factor in their marketing. Bankruptcies in the frozen fish industry, for example, are reported to be increasing at a rapid rate.
The agricultural sector is reported to be in a relatively healthy position. The prices and production of most crops appear to be sufficient to maintain farm incomes and carry the farmers to the next planting season: beet farmers are benefiting from the recent runup in sugar prices; the citrus crops appear to be in good shape due to milder winter conditions; and the type of wheat grown in the Northwest has not been adversely affected by the recent developments in the Russian and Iranian markets. February wheat prices of $4.24 per bushel, for example, are near the October highs of $4.35 per bushel. Vegetable markets have been weak (particularly onions and potatoes), however, and several planting areas in the San Joaquin and Sacramento deltas were lost to flooding.
Evidence of a rapid inflation rate is apparent throughout the District. A dairy firm involved in labor negotiations anticipates that the Teamster's national Master Freight Agreement will be the reference point for many industries. That settlement is tantamount to a 35.5 percent increase in wages over a three-year period. Seattle University expects a 12 to 14 percent increase in compensation costs this year. Natural gas prices have risen 35 to 70 percent in the last year. Newsprint prices are at an all-time high of $375 per ton, causing severe cost pressures for publishers. A regional producer of aluminum reports that aluminum ingots, which normally trade for 66 cents per pound, recently traded on the London metal exchange for $1.01 per pound.