Beige Book Report: San Francisco
March 23, 1983
The Twelfth District economy appears to have moved out of the depths of recession and into the early stage of recovery. Consumer spending and residential construction are leading the upturn. Retail sales at department stores and auto dealerships are improving, while the decline in mortgage interest rates continues to spur a steady recovery in Western homebuilding and sales activity. Manufacturing and mining activity is picking up in a few important industries such as forest products and nonferrous metals, but most of the region's industries continue to experience extremely weak demand. District banks are beginning to more actively seek consumer loan business as an attractive investment for their large new inflow of funds into the Money Market Deposit Account.
Consumer Spending
Retail sales appear to have strengthened in January and to have
remained stable in February despite abnormally inclement weather in
some areas. Major department store chains in Southern California
reported "excellent" sales results for both months, with sales for
January up nearly 10 percent from a year earlier and sales in
February recording a 9 percent year-to-year gain. Even in the
Pacific Northwest, where sales had been extremely depressed,
department stores are reporting strong year-to-year increases. Sales
of both nondurable and durable goods are reported to be improving.
The upturn in home sales is helping to spur sales of furniture and
other big ticket household items. Interest rate concessions by
automobile manufacturers, and declining gasoline prices, have
stimulated sales of automobiles and recreational vehicles.
Inventories at retail outlets (non-auto) are very low and it is
evident that some re-stocking will have to take place soon if sales
continue to pick up.
Manufacturing and Mining
While manufacturing and mining activity is still extremely
depressed, some important Twelfth District industries are finally
beginning to show some life. In the Pacific Northwest lumber
industry, orders and prices have been rising in response to the
recovery in national homebuilding activity, enabling numerous mills
to reopen. The aluminum industry also has reactivated some idle
capacity. In the Intermountain states—Arizona, Nevada, Utah—some
mining facilities also have been re-opening as a result of some
improvement in the demand for copper and other nonferrous metals.
Layoffs continue in a number of other important industries however.
In both California and Washington, the aerospace equipment
manufacturing industry has continued to cut back overall employment
as growth in defense-related payrolls has been insufficient to
offset continued layoffs in commercial aircraft and electronic
equipment programs. The move by Atari, Incorporated to move its
manufacturing operations from Northern California to Hong Kong and
Taiwan to reduce costs is indicative of the intense competitive
pressures existent in the electronics industry. The decline in oil
prices is depressing oil drilling activity and revenues in Alaska
and California and causing layoffs at Intermountain coal and uranium
mining sites.
Construction and Real Estate
The drop in mortgage interest rates continues to spur a further
recovery in homebuilding and sales activity. Housing starts in the
West are now running at more than double the post-World War II low
reached a year ago, and permit activity points to still further
gains in the months ahead. Sales of new homes also are increasing,
but the inventory of unsold homes still remains high in some areas,
particularly Southern California. Home prices are reported to be
rising again. In contrast, commercial development and construction
activity is clearly slowing, and the completion of office buildings
started earlier has led to a rise in unused office space.
Agriculture
Rain storms and flooding have seriously damaged the California farm
sector this winter, causing crop losses estimated at around $300
million. About 20 percent of the state's normal winter wheat harvest
has been lost. Other important fruit and vegetable crops such as
lettuce, artichokes, asparagus and strawberries have suffered
serious damage, causing some increase in prices. But the strongest
pressure on prices could come around May and June, because of delays
in plantings of processing tomatoes and an array of other
vegetables. Also, the storm is threatening the tree fruit and nut
crop by preventing pollination of blooming orchards. Despite recent
price increases, District farmers and ranchers expect 1983 to be
another difficult year, with net income showing little, if any,
improvement over 1982's depressed level. The acreage cutback under
the Federal payment-in-kind program will help stabilize income for
producers of grains and cotton, but only permit them to "survive"
for another year.
Financial Institutions
Loan growth at Twelfth District commercial banks remains weak.
Instead of turning to banks, businesses are taking advantage of
improved bond and equity markets. Mortgage lending remains weak, as
the upturn in housing takes time to translate into mortgage
borrowing. Consumer lending is showing some signs of a pickup
however. Captive finance companies providing discount financing on
auto loans, for example, are experiencing a strong demand for
credit, which in turn is helping to boost auto sales. One large
California bank has already started offering auto loan rates that
are competitive with finance company rates. Other banks appear ready
to more actively promote consumer loans, given their relatively high
yield and the need to invest the sizable volume of new funds
generated by the MMDA's. With the continued strong inflow of funds
into MMDA's, these accounts now represent nearly 20 percent of total
domestic deposits of District banks.