Beige Book Report: San Francisco
May 8, 1996
Reports from 12th District survey respondents indicate a healthy pace of economic activity throughout most sectors and areas in the District. Retail sales reportedly have firmed slightly since earlier in the year, and services continue to expand at a brisk pace. Manufacturing activity appears mostly solid. The District banking and real estate markets are very active, although the real estate sector in Los Angeles has not fully recovered from its lengthy slump. Price and wage increases continue to be moderate overall, with the notable exception of gasoline prices in California. However, respondents expect higher national inflation in the near term.
Business Sentiment
District respondents remain very optimistic regarding their
respective regional economies, and their expectations regarding
national economic growth improved markedly since the last survey.
Among respondents, 70-80 percent see stable or improved prospects
for national GDP growth and unemployment, up from 40-50 percent
earlier this year. However, their outlook on national inflation
deteriorated; nearly 50 percent expect higher inflation in the near
term, up from 15-20 percent earlier this year. Approximately 80
percent of District respondents expect more rapid growth in their
region than in the U.S. as a whole, with large majorities expecting
stable or improved business investment, housing starts, consumer
spending, and trade balances in their respective regions.
Retail Trade and Services
Retail sales are mostly stable in the District, and services
continue to expand rapidly. Sales of clothing and other consumer
goods improved somewhat relative to their pace earlier in the year,
and inventories have been reduced for many retail goods. Grocery
prices currently are stable but may soon increase due to continued
high grain prices.
Among services, demand for communications services continues to rise rapidly; this includes both telephone and computer communication. Transportation demand also is robust. Both volume and prices are increasing on flights to and from Portland, and shipping port expansion is planned there. Shipping activity also is vigorous in Southern California, although a recent sharp rise in gasoline prices is affecting the costs of land transportation in the state.
Manufacturing
District manufacturing activity is solid overall, although with
variability across sectors and states. In Nevada and Utah,
respondents noted strong demand for heavy equipment and machine
tools; order backlogs for the latter have persisted despite
accelerating shipments. A Southern California manufacturer reports
rising prices and reduced inventories for aluminum ingots, and
substantial delivery lags on new trucks were reported in Oregon. In
contrast, declining truck demand is prompting consolidation by a
major truck manufacturer in Washington, and aluminum producers are
operating well below capacity in that state. Also in the Pacific
Northwest, prices for wood pulp and paper products have stabilized
after substantial declines earlier in 1996, but slowed growth and
reduced investment spending were reported for Oregon's food
processing industry.
For the District's key high-tech electronics sector, respondents noted that growth has decelerated in recent months, and prices of semiconductors (particularly computer memory chips) remain at low levels. However, inventories of semiconductors and personal computers are coming down at rates characterized as "acceptable," and substantial expansion of semiconductor manufacturing capacity is planned in the Portland area.
Agriculture and Resource-Related Industries
Reports regarding western agricultural production are mixed, but
respondents note that it is too early in the growing season to
assess overall prospects for 1996. Demand is strong and prices are
high for several crops, notably wheat and corn. Continuing high feed
prices and drought conditions in the Southwest are leading cattle
ranchers to ship large quantities of beef to market earlier than
preferred. Production of tree fruit and grape crops in Central
California are down from normal; although better than last year,
farm earnings are somewhat low there, which reportedly is limiting
investment and expansion plans.
Real Estate and Construction
Real estate sales and construction activity remain strong in most of
the District. Brisk home construction activity and sales along with
significant price increases over last year were reported for
Washington, Oregon, Idaho, Nevada, and Utah. Commercial construction
and sales also are strong in those states. In contrast, the
commercial real estate market in Los Angeles remains soft, with high
vacancies and limited new construction. Conditions appear slightly
improved for residential real estate in the Los Angeles area;
although sales are limited, prices are no longer declining.
Elsewhere in the state, residential and commercial real estate
markets are very tight in the San Francisco Bay Area.
Financial Institutions
District banks report good earnings and loan quality in 1996. The
one exception is Southern California, where consumer loan demand is
still sluggish and real estate loan delinquencies are up, despite
some signs of improved credit quality overall. Loan demand is very
strong in most other areas of the District, although intense
competition is holding margins down in fast-growth states. District
banks continue to invest in computer equipment and other hardware at
rapid rates, largely to facilitate increased reliance on electronic
banking.