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Federal Reserve Districts

Twelfth District--San Francisco

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Economic activity in the Twelfth District continued to expand modestly during the reporting period of mid-July through the end of August. Upward price pressures were mixed but appeared to ease overall, and upward pressures on wages were subdued. Demand for retail items edged up on balance, as did demand for business and consumer services. Manufacturing activity in the District grew a bit further. Demand remained robust for agricultural producers but fell slightly for providers of energy resources. Activity in District housing markets stayed sluggish, and demand for commercial real estate was largely unchanged. District banking contacts indicated that overall loan demand was stable or inched down.

Wages and Prices
Upward price pressures were very limited on net during the reporting period. Further modest price declines were noted for energy inputs and some raw materials. Stiff competition among domestic firms, combined with weak final demand, resulted in largely stable prices for most categories of final goods and services. The primary reported exceptions were clothing and medical care, for which recent cost increases were passed through to final prices.

Upward wage pressures were largely nonexistent, as compensation gains were held down by high levels of unemployment and limited demand for new hires. As a result of uncertain product demand, businesses in most sectors expect to remain highly cautious in regard to hiring for the foreseeable future, suggesting that compensation pressures are likely to remain subdued. However, contacts continued to report significant upward wage pressures for workers with advanced skills in technology fields.

Retail Trade and Services
Retail sales were mixed but rose a bit overall. For general merchandise such as apparel and smaller household items, contacts reported modest improvements in sales, with stronger performance for traditional department stores than for discount chains. By contrast, retailers of major appliances and furniture reported weaker demand resulting from a renewed sense of caution on the part of consumers. Grocery sales were largely flat. Sales of new automobiles improved somewhat, despite ongoing shortages of parts and assembled vehicles for some brands arising from the natural disaster in Japan earlier this year. The demand for used vehicles continued to firm, with contacts noting rising sales and additional upward pressure on prices and trade-in values.

Demand for business and consumer services continued to strengthen overall. Sales expanded further for providers of technology services, as consumer demand for software, e-books, and mobile applications continued to grow. Providers of professional services such as law and accounting reported that demand was little changed from the prior period. Similarly, demand for transportation services was characterized as largely flat. For energy utilities, demand waned a bit during the beginning of the reporting period but improved later. Providers of health-care services reported that demand strengthened somewhat. Conditions in the District's travel and tourism industry improved further, with demand growth reported for the business and tourism segments alike.

District manufacturing activity was mixed but appeared to grow slightly during the reporting period of mid-July through the end of August. Although manufacturers of semiconductors and other technology products reported slower growth for new orders and sales, capacity utilization rates remained high and inventories were near desired levels given the pace of sales. For makers of commercial aircraft, significant increases in new orders for narrow-body aircraft combined with an existing order backlog to keep production rates near capacity. A metal fabricator noted that sales were "steady but slow"and raw materials were readily available. Petroleum refiners reported slightly weaker demand and capacity utilization rates that were largely stable, causing product inventories to rise somewhat. Demand held at very low levels for manufacturers of wood products.

Agriculture and Resource-related Industries
Demand grew further for agricultural products and metals but was down slightly for natural resources used for energy production. Orders and sales continued to expand for a wide variety of crop and livestock products, especially cattle and cotton. Contacts noted that agricultural input costs have stabilized following significant increases in the spring. Rising sales prices for assorted metals spurred further increases in mining activity in parts of the District. Overall demand for crude oil weakened a bit, primarily reflecting weaker domestic demand, but extraction activity for natural gas was largely unchanged.

Real Estate and Construction
Demand for housing and for commercial real estate was little changed from existing low levels. Although the reports pointed to scattered signs of improvement in the entry-level and high-end segments of the District's housing markets, the pace of home sales and construction remained depressed. By contrast, demand for rental space continued to grow, enabling landlords to increase rents and scale back tenant concessions in some areas. Demand for commercial real estate remained weak overall, and vacancy rates for office and industrial space stayed elevated throughout the District. Conditions were mixed across geographic markets, with deterioration in leasing activity for some areas contrasting with ongoing improvements in areas that have benefited from growth in the technology sector, such as the San Francisco Bay Area and Seattle.

Financial Institutions
Reports from District banking contacts indicated that loan demand was largely stable to marginally down compared with the prior reporting period. Citing heightened levels of uncertainty, some businesses showed a reduced desire to engage in expansionary capital spending, reportedly causing demand for commercial and industrial loans to weaken slightly. Contacts in most sectors reported downward revisions to their expectations for growth in their industry for the remainder of the year, suggesting that capital spending will remain muted in coming months. On the consumer side, loan demand was largely unchanged. While lending standards remained relatively restrictive for business and consumer loans, the reports pointed to ongoing improvements in overall credit quality and some loosening of credit standards for selected borrowers.

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Last update: September 7, 2011