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Federal Reserve Districts

Twelfth District--San Francisco

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Reports from Twelfth District contacts indicate continued sluggish economic growth from mid-April through the end of May, although there were scattered reports of modest improvement in some sectors. Prices of final goods and services exhibited little upward pressure overall, despite rising costs for some imported inputs and for employee health benefits. The winding down of hostilities in Iraq apparently did not alleviate fully consumer caution, as most retailers indicated that business was still only comparable to that before the start of hostilities. The effects of the SARS outbreak in East Asia largely were limited to the travel and tourism sector. The manufacturing sector continued to struggle with weak demand and substantial excess capacity, although sales and orders strengthened a bit for some products. District agricultural producers faced solid demand for most crops. Conditions in commercial real estate markets remained soft, while residential real estate remained vibrant in most parts of the District. Bank contacts reported weak demand for commercial and industrial loans but continued strong growth in real estate lending.

Prices and Wages
Respondents noted very limited upward pressure on prices and wages overall. Vigorous competition held prices down for most retail items, and many retail providers offered products at discounted prices during the survey period. The depreciation of the dollar has led to higher costs for some imported raw materials and textiles, but further declines in oil prices have translated into lower retail fuel prices. Except for scattered shortages of construction labor, notably in Hawaii, labor was in ample supply. As a result, wage pressures were limited throughout the District, although many employers noted a continued rise in the cost of employee health benefits and workers' compensation insurance.

Retail Trade and Services
Conditions in the retail sector were mixed, but, on net, sales appear to have improved slightly compared with the previous survey period, which included the period of major hostilities in Iraq. The winding down of hostilities in Iraq, however, apparently did not fully alleviate consumer caution, as most retailers indicated that business was still only comparable to that before the start of the war. Auto sales remained at high levels but were a little slower than during the previous survey period, and contacts noted significant inventory accumulation at dealers. Outside of autos, sales generally were described as still being a bit slow; retailers kept inventories quite lean, and their planned capital spending was flat compared with last year.

District service providers also faced mixed conditions. Demand for health services grew further, and some providers expanded capacity through new investments. However, providers of telecommunications, cable, and internet services continued to struggle with substantial excess capacity. Concerns about the SARS epidemic in East Asia reduced business and leisure travel in the District in recent weeks, although in such destinations as Hawaii and Las Vegas, weak international tourist traffic was largely offset by solid domestic tourism. Contacts also noted that fears about the spread of SARS had no discernible impact on overseas shipping activity.

District manufacturers faced weak demand and substantial excess capacity in general, although a few contacts noted solid conditions or signs of improvement. Producers of the most advanced information technology products saw strong demand and have plans to expand production capacity. Most manufacturers of information technology products, however, struggled with slow sales and low capacity utilization. In the Pacific Northwest, some manufacturers of wood products and paper responded to weak demand by temporarily idling production processes. Because of limited airline demand for new planes, District production of commercial aircraft reportedly has dropped to the lowest levels since the mid-1990s. In contrast, manufacturers of construction equipment saw stepped-up demand, partly because of a seasonal pickup in construction activity. Moreover, a few firms in various industries reported plans for increased capital spending, although these plans were largely limited to replacement of aging equipment. Concerns about the spread of SARS reduced business travel and reportedly caused some disruption of overseas supply chains, such as delayed product development in apparel manufacturing, but the net impact on manufacturing was small.

Agriculture and Resource-related Industries
Overall conditions for District agricultural and resource-related businesses remained solid in the most recent survey period. Sales were strong for beef cattle and for most crops, in part because the depreciation of the dollar boosted demand. Contacts noted that demand for oil and natural gas was robust, and producers responded with further expansion of extraction capacity.

Real Estate and Construction
Conditions in District real estate markets remained sluggish on the nonresidential side but vibrant on the residential side. Vacancy rates for commercial space have been stuck at elevated levels in most areas, with little or no sign of improved demand. As a result, commercial rents were flat or slightly down, and commercial construction activity remained languid. By contrast, low interest rates reportedly spurred brisk sales of new and existing homes in most areas, driving prices and construction activity up further. Moreover, in the San Francisco Bay area, where the market for rental housing had been in a slump for the past two years, rental rates for apartments reportedly rebounded a bit during the recent survey period.

Financial Institutions
District banking contacts reported strong demand for new residential mortgages and further gains in refinancing activity for residential and commercial real estate loans. In contrast, commercial and industrial loan demand remained weak in most areas, except in Hawaii, which saw further expansion because of relatively robust economic conditions. Respondents from several parts of the District reported stable or slightly improved credit quality of bank loans. Some banks reported investment plans to replace information technology equipment.

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Last update: June 11, 2003