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Federal Reserve Districts

Twelfth District - San Francisco

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Reports from Beige Book contacts indicate continued strong growth in most Twelfth District states through the first quarter of 1997, with the exceptions being Alaska and Hawaii. District retailers reported healthy first quarter sales, and service providers, particularly those in the tourism sector, noted continued rapid expansion. Manufacturing activity in the District remained strong, propelled by a booming aerospace industry and steady expansion in high-technology equipment manufacturing. Increased demand for residential and non-residential real estate continued to boost construction activity in much of the District. Respondents' generally favorable views of the economy were tempered by reports of material and labor shortages, particularly in construction and high-technology manufacturing. Tight labor markets reportedly have prompted some businesses to sponsor job fairs to attract potential employees.

Business Sentiment
District respondents expect a more moderate, but still solid, performance in the national economy, with regional growth outpacing the national rate. About one-half of the respondents expect U.S. GDP growth to return to its long-run average pace, leaving the national unemployment rate near its current level. An increasing number of respondents (56 percent) expect inflation to edge up in coming quarters. Nearly all respondents expect economic growth in their region to outpace growth in the national economy over the next year. Respondents are most optimistic about the strength of business investment, housing starts, and foreign trade in their areas. The only exceptions to this optimism were respondents in Alaska and Hawaii, who expect below average growth for their states.

Retail Trade and Services
Retailers from most District states reported a healthy first quarter, strengthened by sales growth in February and March. Reports were strongest in California and the Intermountain states, where improvements in food, pharmaceuticals, and clothing sales were noted. Retailers reported lean, although generally sufficient, inventory levels and no problems obtaining merchandise from suppliers. Respondents noted that stiff competition continues to hold down prices.

Service industry respondents in most District states continued to report solid growth. Providers of telecommunication services reported steady demand for their products, although equipment delivery delays are beginning to constrain activity. Respondents from California, Nevada, Oregon, and Utah reported brisk demand for tourism-related services, keeping hotel occupancy rates high, particularly in San Diego, Las Vegas, and Portland. In the Salt Lake City area the winter "room crunch" eased slightly with the close of the region's ski season, but conventions and other tourism activity continue to keep occupancy rates above year-ago levels. In contrast, contacts in Hawaii reported a drop in tourism activity as international tourist traffic declined in response to a strengthening dollar.

Reports on District manufacturing were highly favorable. In the Pacific Northwest, the aerospace and high-technology sectors continued to expand, spurring growth in other areas of the District. Southern California in particular has benefited, collecting a large share of Boeing's sub-contracts for its long depressed aerospace industry. Boeing's rapid ramp-up in production reportedly has created shortages of aircraft electrical components and machinery; all other materials are reportedly in good supply. Accelerating growth also was reported in the food processing and forest products sectors in the Pacific Northwest and in the garment industry in Southern California. Respondents throughout the District noted short supplies of highly skilled workers. In the Puget sound and San Jose areas some high-technology firms have resorted to job fairs to recruit new workers.

Agriculture and Resource-Related Industries
Reports on District agriculture conditions were generally favorable. Spring planting is well underway in the District and early reports indicate good crop development. Reports on the District's cattle industry also were positive. Lower grain prices and higher calf prices have created favorable conditions for District ranchers.

Real Estate and Construction
Residential real estate activity remained healthy in most District states. In the Pacific Northwest, continued strong demand for single family homes reportedly has driven up prices and created shortages of construction materials and labor in the area. In the Intermountain states, residential construction activity slowed in recent months, but remains at a high level. In California, respondents from the San Francisco Bay Area noted strong new and existing home sales; respondents from Southern California reported meaningful improvement in sales of existing homes.

Commercial construction activity was strong in most parts of the District. In the Pacific Northwest commercial vacancy rates continued to drop, fueling an already booming nonresidential construction market. Industrial construction activity in the Pacific Northwest also increased as manufacturing firms continued to demand new facilities. In Utah, infrastructure projects such as the rebuilding of Interstate 15 and the development of a light rail system are augmenting the fast-growing commercial construction sector. In California, respondents report rapid declines in commercial vacancy rates in the San Francisco Bay Area and rental prices are increasing. However, speculative commercial construction activity remains weak. In Los Angeles, commercial vacancy rates also are declining, although they remain above those for the state as a whole.

Financial Institutions
District financial institutions continued to report good loan demand and generally favorable credit conditions. Financing remains readily available for qualified businesses and fierce competition is forcing lenders to offer very favorable financing terms. Respondents from the banking industry noted increased difficulty in getting and maintaining deposits in recent months, a circumstance they attribute to the strong equities market.

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Last update: May 7, 1997