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Federal Reserve Districts

Twelfth District--San Francisco

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Twelfth District contacts reported solid growth in the economy in October and early November. Respondents noted little upward pressure on prices for most consumer goods and services. Increases in wages and salaries also were limited, and many District businesses reported shifting rising health benefit costs to employees. Consumer spending in the District, excluding auto sales, remained solid in recent weeks, boosted by preholiday discounting and an early start to the winter ski season. Contacts reported that stronger domestic growth and a weaker dollar increased demand for many District manufactured goods and agricultural products. District housing markets remained highly active in recent weeks, and there were scattered signs of improvement in commercial real estate conditions. Bank contacts reported a pickup in deposits and business loan demand; mortgage lending remained at high levels despite continued contraction in refinancing activity.

Prices and Wages
District contacts reported little change in consumer prices in the recent survey period. Lumber and other building materials were the main exceptions to this trend; robust housing starts, rebuilding efforts in Iraq, expected rebuilding in Southern California following the fires, and higher export demand for materials reportedly contributed to the price increases. Slack labor markets damped wage increases in most sectors. However, some businesses reportedly have reinstated year-end bonus programs, albeit at modest levels. Regarding benefits, employers noted continued rapid increases in healthcare costs, with a significant portion of the increase passed on to employees.

Retail Trade and Services
Reports from District retailers indicated consumer spending, excluding autos, was solid in October and early November. Preholiday discounting spurred robust sales at big-box retailers, and department store sales remained healthy. Despite steady sales growth in recent months, District retailers generally have kept inventories lean and have limited seasonal hiring. Automobile sales slowed further in October and early November; during the period dealer incentives dropped off and vehicle licensing fees in California increased. The recent slowdown in sales has left several District dealers with significant inventories, especially of domestic brands; dealers noted that new incentive programs will be rolled out over the next several weeks to work off accumulated inventories.

Consistent with solid consumer spending, the District's travel and tourism sector experienced a pickup in demand. Early snows and cold conditions in ski areas pushed up the start of the winter travel season in many parts of the District. In Hawaii, domestic visitor counts continued to grow. International visitor counts remain soft, but respondents expect the weaker dollar to boost international traffic in coming months; a weaker dollar already is credited for increased daily spending among recent international visitors. Hotel occupancy rates climbed and reservation bookings at restaurants grew in several District markets.

Providers of several business services also noted improved conditions. Contacts in advertising and software production reported a pickup in demand for their services, albeit from low levels. Demand for professional services, such as accounting, securities, and legal services stabilized, following months of contraction. The healthcare services sector continued to expand in many areas of the District.

District manufacturing activity increased in October and early November. Orders for and sales of semiconductors rose solidly in recent weeks, further boosting capacity utilization and pushing prices on high-end chips up slightly. Makers of machine tools noted that stronger domestic conditions, several District infrastructure projects, and the weaker dollar pushed up demand for their products. Manufacturers of lumber, wood products, and other building materials also reported a pickup in demand, citing improved trade conditions, strong housing markets, reconstruction efforts in Iraq, and expected rebuilding in Southern California following the fires. Increased export demand benefited apparel makers, although several noted the continued shift of production to lower cost areas such as China. The pickup in demand among District manufacturers reportedly slowed the pace of job losses.

Agriculture and Resource-related Industries
District agricultural producers reported increased yields along with stronger demand. Agricultural exports continued to rise, with especially strong sales to EU countries. District natural gas providers reported a slight decline in prices and noted that natural gas storage facilities are fully stocked for the winter season.

Real Estate and Construction
Respondents reported considerable strength in District residential real estate markets during the most recent survey period. Sales of new and existing homes remained strong and new home construction continued at a brisk pace in many District markets. Respondents reported that home prices continued to rise in most regions. Contacts noted that the rebuilding of homes destroyed by the recent fires in Southern California likely will add to the cost of building materials and wages for construction workers.

On the commercial side, there were scattered signs of improvement, although conditions overall remained weak. Office markets in Arizona and Nevada reportedly benefited from the movement of some businesses out of California. In other states including Oregon, Utah, and Washington, businesses began to renew rather than relinquish leases on existing office space.

Financial Institutions
Bank contacts in the District reported a pickup in deposits and demand for business loans during the most recent survey period. Although commercial and industrial lending remains at low levels overall, several contacts noted that the recent pickup represents the first increase in demand in this sector in some time. Credit quality remains high, with few loan delinquencies or defaults. Mortgage lenders report that they have mostly worked off the significant backlog of mortgage applications built up during the refinancing boom. However, origination of new mortgages for home purchases remained strong, keeping mortgage lending at high levels throughout the District.

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Last update: November 26, 2003