Beige Book Report: San Francisco
May 3, 1989
Summary
The Twelfth District economy continues healthy, although there are
signs of slowing in some sectors. Manufacturing activity overall
continues strong, and agricultural conditions have improved in the
West. Retail sales are reported to be sluggish. Most District
business contacts expect slower economic growth during the next
year. Conditions in the forest products and financial industries are
reported to be mixed. Oil prices have risen sharply on the West
Coast since the Alaska oil spill. Real estate activity continues
strong in most parts of the District. although some signs of slowing
are emerging.
Business Sentiment
Most Twelfth District business leaders contacted in early April
expect slower economic growth during the next year with fifty-six
percent expecting GNP growth during the next four quarters to be
slower than it was in 1988. Responses indicate weaker growth
prospects for business investment, consumer spending, housing
starts, and the trade balance. Housing starts are the weakest
sector, with 92 percent of District business contacts predicting
slower activity during the next year.
Consumer Spending
Several respondents report sluggish retail sales in recent weeks.
One notes that the weakness could be related to the early Easter or
to unseasonable weather. Several note that sales of soft goods,
including housewares and women's apparel, are relatively stronger
than are sales of big-ticket durable items such as furniture and
electronics.
Auto sales are reported to be slow throughout the District, a condition many attribute to higher interest rates. One auto dealer reports that, although sales were up sharply in early April, the increase was no more than seasonally expected, despite sales incentives. Moreover, he notes that the recent jump was not enough to take the pressure off dealers. Prices are still soft, and dealers are ordering very cautiously to avoid excessive inventory buildup.
Manufacturing
Manufacturing activity overall continues strong. The aerospace
industry continues to experience strong commercial aircraft demand
in the face of limited production capacity. Boeing, for example,
currently has an order backlog in excess of $55 billion and is late
with deliveries of its 747-400. To boost production, the company has
arranged to borrow more than 603 skilled mechanics from Lockheed for
periods ranging up to six months, in addition to continued heavy
hiring of permanent employees. Local firms complain that Boeing is
hiring workers away at wages they are unable to match. Despite
Boeing's efforts at increased production, the backlog of orders
continues to rise due to the large volume of new orders received.
Most other manufacturing sectors report more moderate growth, although activity appears to be weakening in product lines tied to construction activity. For example, demand for paints and coatings is flat compared with a year ago, and a large floor covering distributor reports a 12 percent decline in carpeting sales from last year's level.
Agriculture and Resource-Related Industries
Agricultural conditions have improved in the West. Heavy March rains
eased the drought in most of California's agricultural regions,
although water supplies remain low for some areas of Southern
California, Arizona, and parts of Idaho. Unusually hot weather in
early April damaged the strawberry crop in California and threatens
to limit grazing in Arizona. Low inventories of grain seeds have
caused seed prices to rise by as much as 50 percent over last year's
level. Consumption of apples and grapes is returning to normal,
following sharp declines triggered by the Alar and Chilean grape
scares, respectively. Seafood prices are stable despite the oil
spill in Alaska.
Conditions in the forest products industries are mixed. Consumption of linerboard and boxes is rising at a 2 percent rate, while newsprint consumption has fallen with a decline in classified advertising. Shortages of logs have boosted prices despite slowing consumption by the construction industry. Lack of available logs has caused some lumber mills to reduce capital expenditure plans, and one lumber industry contact reports reducing his firm's capital expenditure budget to a third of its originally planned level. Further expansion is anticipated at paper mills.
Oil prices have risen sharply on the West Coast in the aftermath of the Alaska oil spill. Sources in Alaska report that the spill is helping the Alaskan economy at the moment, with fishermen being paid $2,500 per day for use of their boats in the clean-up operation. Exxon has told area residents that the company will compensate them for all reasonable claims of lost income resulting from the spill.
Construction and Real Estate
Real estate activity continues strong in most parts of the Twelfth
District, although some signs of slowing are emerging. Home prices
in California and Washington continue to escalate, with multiple
offers above asking price now occurring frequently in Seattle.
However, construction activity is limited by a lack of available
urban land and, more recently, by a more cautious attitude
engendered by higher interest rates. Moreover, one respondent notes
that his company has postponed some construction projects due to the
recent interest rate hikes.
Financial Sector
Many banks and thrifts report that demand and savings deposit
balances have fallen in recent weeks, as consumers shift funds
toward money market funds, certificates of deposit, or treasury
bills in response to higher interest rates. Most report weak demand
for consumer loans. The relatively healthier demand for mortgage and
home equity loans is attributed by many to federal income tax
considerations. One banker notes that although his institution is
generating few new loans, most of those issued are going to well-
qualified borrowers. Financial institutions are fairly evenly
divided between those reporting narrower and wider interest spreads
as rates have risen.