Beige Book Report: San Francisco
June 23, 1987
Summary
Economic conditions are healthy in most parts of the Twelfth
District, although weakness persists in the intermountain area and
in Alaska. Spending on consumer products, including automobiles, has
slackened in recent months, but the pace of manufacturing activity
has improved. Forest products activity continues at a strong pace,
while higher prices for many western agricultural products bode well
for mining and farming enterprises. The recent upturn in oil prices
has sparked optimism among California oil producers, but oil-related
problems in Alaska continue to mount. Higher interest rates have had
little impact on construction activity in most areas, as residential
markets continue generally healthy and nonresidential activity
already had been slowed by high vacancy rates and tax reform.
Financial institutions have experienced sharp reductions in home
mortgage refinancing applications, and many report a renewed
interest in adjustable rate instruments. However, few bankers report
significant declines in mortgage applications for home purchase.
Consumer Spending
In many parts of the District, the pace of consumer spending has
slowed in recent months. Sales of both domestic and imported cars
are reported to be lackluster in several areas, including the
otherwise economically healthy San Francisco and Seattle areas. In
the San Francisco area, auto sales reportedly are down 21 percent
from last year, with inventories rising. Several respondents noted
that although new car sales are down, used cars are selling very
well. In the Eugene, Oregon, area one auto dealer estimates that he
sells two used cars for every new car sold.
More generally, respondents in Arizona and Washington report moderating of the previously robust activity in those two states. In Idaho, sales tax receipts for April were higher than they were in March, but remained substantially lower than their year-earlier level. Import-dependent retailers and distributors are being hurt by the reduction in imports that has taken hold in recent months.
Manufacturing
Manufacturers of some products that compete against low-cost imports
report strengthening sales and orders which they attribute to the
reduced value of the U.S. dollar. Sectors reporting improvement
include apparel, semiconductors, and computers. One large
semiconductor maker has announced that it intends to complete two
Oregon facilities which were put on hold in 1985 due to the
semiconductor industry slump.
Agriculture and Resource-Related Industries
Lumber production continues to be strong, and many mills are running
at peak levels. China is becoming an increasingly important market
for these products. Already this year, 8.5 million tons of railroad
ties have been exported through Portland to China, and shipment of
10.5 million board-feet of lumber to China will begin in August.
Demand in Japan and Europe also has been bolstered, by the reduced
value of the dollar. Overall, lumber exports are 28 percent higher
than they were a year ago. The volume of orders declined in April
and early May due to the increase in mortgage interest rates, but as
rates stabilized later in the month orders picked up again.
The prospects for many western farmers have improved. Cattle producers are enjoying higher prices and lower feed costs, while potato and fruit growers benefit from a mild winter and increased production. California cotton commands prices double the level of last year, as strong foreign markets, notably in China, buoy demand.
However, dry weather in some parts of the District has raised concerns about summer yields. Wheat farmers, among others, continue to experience low prices. Despite high participation rates in government acreage-reduction programs that should reduce the current oversupply problem, they see little prospect of improvement. These problems are particularly apparent in eastern Washington and Oregon, in southern Idaho, and Utah.
In Kern County, California, oil industry prospects have improved modestly since the price of local oil rose to $13 per barrel from less than $10 a year ago. In contrast, Alaska's economy continues to founder. One company reports that the volume of freight it ships to Prudhoe Bay is down 70 percent from last year's level.
Construction and Real Estate
Most respondents reported that the increase in interest rates this
spring has had little effect on the volume of real estate activity
in their areas. In the San Francisco Bay Area, for example, the real
estate market has been healthy through May. One East Bay developer
placed forty-seven "spec' lots on the market, at prices of $75,000
and up, and sold forty of them on the first weekend. Although
residential construction activity remains largely unaffected at this
point, some builders reportedly are scaling back plans for
residential units in 1987, and generally are taking a more cautious
attitude. Moreover, some building materials dealers have reported a
sharp drop in low-end housing starts, since low income buyers are
particularly sensitive to higher interest rates.
High vacancy rates and changes in the tax law caused a slowdown in commercial construction activity earlier in the year, and higher interest rates appear to have had little additional impact. A few projects which do not pencil out at the higher rates have been squeezed out. One banker argues that some developers have withdrawn loan applications, hoping that rates will fall later in the year.
Financial Sector
The initial jump in mortgage interest rates caused a flurry of
activity in April, apparently due to concern about the possibility
of further rate increases. Several bankers report that the increase
in interest rates has reduced demand for mortgage refinancing and
renewed interest in adjustable-rate instruments. For example, one
banker reports that refinancing applications have fallen to thirty
percent of their previous level. The same banker notes that while
fixed-rate mortgages previously comprised about 85 percent of his
bank's mortgages closings, they now account for only 60 percent of
its total. Most bankers report little change in the number of
mortgage applications for housing purchases, but one claims that the
number of applications has dropped to a third of the level seen
several months ago.