Beige Book Report: San Francisco
March 15, 1989
Summary
Business contacts in the Twelfth Federal Reserve District indicate
that economic conditions continue to be healthy, with little
evidence to suggest that the overall pace of growth is slowing.
Expectations regarding GNP growth rebounded in March, with only a
third of respondents now expecting weaker growth during the next
twelve months. Consumer spending on soft goods has improved in
recent weeks, although car sales have been sluggish. Manufacturing
activity continues healthy in most manufacturing sectors, with
commercial aircraft particularly strong and mixed news coming from
electronics and defense firms. Resource industries are stable, but
limited log supplies are constraining growth in the forest products
industries. Cold and dry weather has generated concern among
farmers. Most of the District enjoys healthy construction and real
estate conditions, although reports from local observers suggest
that the rate of growth may be slowing. Earnings of Twelfth District
banks rose to record levels in 1988, but some bankers are concerned
that narrowing interest margins and lackluster loan demand may cut
into 1989 profits.
Business Sentiment
Respondents expectations regarding GNP growth rebounded in March.
Only 32 percent anticipate weakening during the next year, down from
70 percent in January. Expectations regarding business investment
are unchanged, while the prospects for housing and consumer spending
seem to have improved. Respondents are less optimistic about
improvements in the trade deficit, however.
Consumer Spending
Department store sales have improved, primarily due to gains in
women's fashions. Sales currently are running 5 to 6 percent above
year-ago levels. Reports suggest that higher interest rates have had
little noticeable effect on busing activity. In Arizona, one
consumer confidence index rose 9.3 percent between October 1988 and
January 1989.
In contrast, car sales have slowed. Dealer inventories are building, so dealers are being very cautious about additional ordering. Higher interest rates are not now the determining factor for car sales, but tighter credit requirements are hurting volumes. As a result, one dealer reports that 30 percent of his potential buyers were turned down for their loans - the highest turndown rate in 3 years.
Manufacturing
Activity remains healthy in most manufacturing sectors. Capacity
limits are binding for many aerospace suppliers and major commercial
aircraft companies. Concern is rising that both Boeing and McDonnell
Douglas could lose business to Airbus Industrie because delivery
times are now so long. McDonnell Douglas is considering building new
plant capacity and reportedly is looking outside of Southern
California because of the high cost of doing business there.
Reports are mixed for electronics and defense firms. Some respondents note strong electronics and high-tech activity, while others note recent weakening, particularly in semiconductor orders.
Business continues relatively strong in the paint and coatings industry, with some key raw materials in short supply and escalating in price. For several years, paint and coatings manufacturers have held the line on price increases, despite higher costs, but prices are expected to rise soon.
Agriculture and Resource Related Industries
Although agricultural market conditions currently are good, weather
poses a threat to many western agricultural producers. Freezes have
hurt the citrus and strawberry crops, although it is still too early
to assess total damage. Continued dry weather through much of the
winter has heightened concerns about water availability this summer.
Unless March rains are much more plentiful than normal, California
farmers will suffer cutbacks in water allocations of as much as 60
percent.
As of early February, lumber and wood products orders were running about 7 percent behind last year's level. 1988 production in the coast region was about 10 percent below its 1987 level, and the industry faces supply problems for 1989. Log prices are reported to be up as much as 33 percent, as high log exports stimulate demand while Forest Service policies constrain log supplies. Because of problems obtaining logs, 33 lumber mills on the West Coast have closed down during the past six months.
Several reports indicate that paper has become more expensive and more difficult to obtain in sufficient quantity. Prices rose about 5 percent for bond paper and 1 percent for newsprint on January 1.
Construction and Real Estate
Construction and real estate activity remain healthy in coastal
states. Several respondents note slowing real estate and
construction activity although there is disagreement regarding
whether recent increases in interest rates have played a role. Some
note that the volume of sales has increased recently, and attribute
this rise to the fear of further rate increases.
Office building in downtown Los Angeles continues strong, buoyed by foreign investment. Some are concerned that if current plans are carried out, over-capacity could be a serious problem by 1992.
Financial Sector
Most bankers and thrift executives report that loan demand remains
relatively weak. Loan volume has been flat for about six months. Few
attribute the weak demand to higher interest rates, focussing
instead on the continued small pool of quality borrowers. One banker
notes that inquiries and fundings on home equity lines are
unchanged. In contrast, others argue that higher rates have affected
loan demand, making some customers more cautious about borrowing and
causing others to borrow before rates increase further. Large banks
in Oregon and Washington report that total loans and leases have
been rising slightly faster in recent weeks, with accelerating
growth in secured real estate loans and weakening growth in
unsecured credit.
Some bankers report that deposit growth is strong, but others report that the recent rise in interest rates has hurt balances in passbook savings and market interest accounts. Earnings at District commercial banks were up strongly in 1988, following a loss in 1987. Among District commercial banks, return on equity was 15 percent and return on assets was 0.9 percent, both higher than national averages. However, some bankers have expressed concern that a narrowing gap between borrowing and lending rates may be squeezing profits. But one banker notes that the large proportion of adjustable-rate loans should mitigate the problem to some extent.
The financial services industry in Arizona continues to show the effects of the downturn in construction. Results for financial institutions are mixed, with sone institutions reporting significantly improved earnings over 1987, while others recently have made additional provisions for reserves.