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Federal Reserve Districts

Twelfth District--San Francisco

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The Twelfth District economy expanded further during the survey period of September through early October. Increases in energy prices added to inflationary pressures in some industries, although overall price inflation remained modest. District labor markets tightened further, with significant wage increases reported for selected high-skill occupational categories. District retail sales weakened somewhat, but service providers saw continued strong demand. Most manufacturers and producers of agricultural and resource-related products saw further growth in output and sales. Activity in residential real estate markets remained robust but slowed slightly in some areas, and commercial real estate markets improved further. District banks reported strong loan demand and good credit quality.

Wages and Prices
Price increases generally were limited to products and services for which energy costs are a significant share of total costs. Prices rose significantly for transportation services and energy-intensive goods such as plastics, petrochemicals, fertilizers, and selected building materials, and contacts noted fuel and freight surcharges of up to 30 percent for some items. Final prices for most goods and services were largely stable, however, with contacts citing strong competitive pressures and continued gains in production efficiency as factors that limited the impact of rising input costs on final prices.

Respondents reported further tightening in District labor markets in recent weeks, especially for workers with specialized skills in the financial, construction, information technology, resource extraction, and health-care services sectors. Wage pressures for these occupations were up noticeably, and one producer of natural gas in Idaho reported recent salary increases near 14 percent for selected occupations. By contrast, salary increases remained much more modest outside of these sectors and occupations, in the range of 3 to 4 percent on an annual basis. Employers' costs for employee benefits continued to rise more rapidly than wages, though less rapidly than in previous survey periods.

Retail Trade and Services
District retail sales weakened somewhat. Retail contacts in several areas noted slower sales, reportedly due in part to a decline in consumer confidence and reduced spending power arising from higher gasoline prices. Automobile sales fell relative to the previous survey period but reportedly remained at high levels. Sales of imported vehicles were strong, but sales of domestic brands slowed, due in part to a shift away from SUVs and trucks to more fuel-efficient automobiles.

Activity in the services sector expanded significantly on net. Demand grew further for providers of health-care, media, real estate, and transportation services, but contacts noted uneven demand for high-tech services. District travel and tourist activity remained vigorous, notably in Hawaii, where domestic and international visits have been at record levels. Hotel occupancies and room rates rose further in several markets, with demand stimulated in part by relocation of business conferences away from cities affected by the recent hurricanes.

District manufacturers in general reported solid demand and sales for their products in September and early October. Semiconductor contacts reported a modest increase in orders and sales and a steady rise in capacity utilization, with improved profitability noted as well. Makers of machine tools and industrial equipment saw strong demand. A strike by Boeing machinists put a temporary halt on commercial aircraft production in the Pacific Northwest, but the strike was resolved within a month and production returned to its earlier high level. Increased demand arising from the recent hurricanes added to underlying demand strength for several product groups, including processed foods and beverages, shelter and storage products, and selected building materials. Contacts also reported scattered materials shortages due to interrupted production in areas affected by the hurricanes, notably for plastic pipes. Apparel manufacturers reported little change in output and sales.

Agriculture and Resource-related Industries
Providers of agricultural and resource-related products reported strong demand. Orders and sales for a variety of crops, beef cattle, and dairy products expanded further, and contacts noted good profitability despite rising input costs. In the energy sector, District producers of natural gas operated at or near full capacity, and inventories reportedly were adequate.

Real Estate and Construction
Demand for residential real estate remained strong, while the market for commercial real estate tightened further in most areas. Home sales, price appreciation, and construction activity continued at rapid rates, although contacts in some areas noted a gradual slowing in the pace of price increases and sales. On the commercial side, demand for office space strengthened further, and rental rates rose in most major markets. In the midst of high levels of construction activity, scattered shortages of building materials emerged, reportedly leading to project delays and potential cancellations in a few rapid-growth areas.

Financial Institutions
District banking contacts reported further growth in loan demand and solid asset quality during the survey period. Demand for commercial and industrial loans grew further in most areas, while demand for construction, commercial real estate, and home loans remained at high levels or grew as well. A Southern California respondent noted slight slowing in the pace of loan growth in that region. Asset quality reportedly was high, with declining delinquencies noted in some areas.

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Last update: October 19, 2005