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Federal Reserve Districts

Twelfth District--San Francisco

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The Twelfth District economy expanded at a solid pace in late July and August. Inflation was reportedly well contained, except for frequently noted price jumps in energy-intensive products and services. Labor markets tightened a bit further, particularly for several high-skill occupational categories. District retailers and service providers reported solid demand in recent weeks, and manufacturing activity continued to expand throughout the District. Demand for District agricultural and resource-related products was strong. Activity in residential real estate markets remained robust, and commercial real estate markets improved further. District banks reported strong loan demand and high overall credit quality.

Wages and Prices
Contacts reported that increases in inflationary pressures were limited to products and services for which energy costs are a significant component. For instance, prices were reported to have increased notably for transportation services, fertilizers, and some construction materials. More generally, though, prices for most other goods and services remained stable, with contacts citing strong competitive pressures and continued gains in production efficiencies as the primary reasons for pricing restraint.

District labor markets tightened a bit further during the survey period, especially for high-skill occupations within the financial, construction, information technology, and health-care services sectors. As a result, increases in compensation for these positions were prevalent. By contrast, wage pressures outside of these sectors and for less skill-intensive occupations reportedly remained modest. However, contacts continued to report that for most sectors and occupations, non-wage costs, such as benefits, grew faster than base salaries.

Retail Trade and Services
District retailers and service providers reported solid sales and improved inventory positions in the most recent survey period. Sales of both new and used motor vehicles, particularly light trucks, were strong; sales of domestic brands soared, spurred by generous discounts by manufacturers. Retail sales outside of motor vehicles also reportedly did well, especially for apparel. Demand for District services remained strong overall. District travel and tourist activity was robust in many areas, as observed by further increases in hotel occupancy rates and average daily room rates in Hawaii and California. The tourism sector in Hawaii benefited from higher numbers of both domestic and international visitors.

Contacts reported solid demand for District manufactured products in late July and August. Respondents at semiconductor firms reported strong orders and sales and generally balanced inventories, while contacts at other IT producers noted that demand softened somewhat. Orders increased at commercial aircraft and defense product firms. Some food processors reported a pickup in foreign demand. Finally, many manufacturers noted higher costs for energy and energy intensive inputs; not all of the manufacturers were able to pass these cost increases on to final sales prices.

Agriculture and Resource-related Industries
Demand remained solid among District agricultural and resource-related producers. Prices were stable for a variety of agricultural products, including cotton, fruits and vegetables, and beef. Of note, contacts reported that overall production costs have been boosted by higher energy and transportation costs. In the energy sector, producers of oil and natural gas operated at or near full capacity and inventories remained close to last year's levels.

Real Estate and Construction
Residential real estate markets in the District continued to be robust, while commercial real estate markets improved further in recent weeks. The pace of home sales, price appreciation, and construction, including home improvements was rapid in most areas. However, several contacts indicated that the housing market may be leveling off, as witnessed by increased time on the market for single family homes and a flattening of price increases. On the commercial side, demand strengthened further; office vacancy rates fell and rental rates increased in many District markets, notably in Southern California. Construction activity was strong overall throughout the District, reflecting a full pipeline of residential, commercial, and large public projects.

Financial Institutions
District banking contacts indicated generally solid loan demand and good credit quality in late July and August. Demand for business lending continued to improve in many markets. The volume of commercial real estate, construction, and home loans remained at high levels in most areas and grew further in some.

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Last update: September 7, 2005