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Federal Reserve Districts

Twelfth District--San Francisco

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The Twelfth District economy continued to expand at a solid pace during the survey period of late November through the beginning of January. Price inflation was modest overall, helped in part by recent declines in energy prices. Contacts reported moderate wage increases in general, with more rapid increases reported for workers with specialized skills in selected industries. Retail sales expanded during the holiday season, and service providers reported further demand growth. Manufacturers and agricultural producers saw strong demand for their products. Activity in residential real estate markets generally remained at high levels but slowed in some areas, while demand for commercial real estate improved further. District banks reported steady loan demand overall and very good credit quality.

Wages and Prices
Contacts reported that upward price pressures diminished somewhat, as prices for energy and related products receded from previously high levels. Construction materials remained in short supply in some areas, keeping construction costs at elevated levels or raising them further, and prices on selected manufactured goods rose significantly of late. In most sectors, however, vigorous competition and continued gains in production efficiency reportedly held down increases in final prices, keeping overall price inflation modest.

Wage increases reportedly were moderate on net, in the range of 3 to 5 percent on an annual basis. However, the pace of wage growth was substantially more rapid for workers with specialized skills in the financial, construction, and health-care services sectors. Employers' costs for employee benefits, particularly for health insurance, continued to rise more rapidly than wages.

Retail Trade and Services
District retailers reported generally solid performance for the holiday season as a whole, with sales up in dollar terms and in unit terms relative to last year. Sales growth was evident for most retail market segments, with department stores and establishments specializing in luxury products performing especially well. Contacts noted that the extent of holiday season discounting was about the same as last year. Overall, most contacts reported that holiday sales met or slightly exceeded expectations, leaving retail inventories generally in balance. Sales of new automobiles improved slightly in the wake of very weak performance during the previous survey period. According to an Idaho contact, inventories of used vehicles were unusually low and prices rose "dramatically," as available supply was redirected to areas of the country where vehicles were damaged by the September hurricanes.

Service providers reported continued strong demand. Sales grew further in the food and beverage, health-care, media, and transportation sectors. District travel and tourism activity remained vigorous, especially in Hawaii, where growth in visitor numbers and spending has been setting records and hotel occupancy rates have continued to rise.

District manufacturers reported strong demand for their products during the survey period of late November through the beginning of January. Orders and sales of semiconductors grew further and capacity utilization remained at high levels. District makers of machine tools and industrial equipment saw robust demand and consequently operated at or near full capacity. Makers of commercial aircraft expanded employment further during the survey period, and they continued on a rapid production path to meet the surge in orders experienced in 2005. Demand remained strong for various building materials manufactured in the District, including wallboard and insulation, although one respondent characterized demand for fabricated metals as "stable but lackluster." District food processors reported steady growth in sales.

Agriculture and Resource-related Industries
Providers of agricultural and resource-related products reported strong demand and generally good supply conditions. Orders and sales grew further for a variety of agricultural products, including various crops and livestock. Prices were largely stable, although one contact noted price fluctuations for specialty produce due to unseasonable weather that affected yields. In the energy sector, District producers of oil and natural gas reportedly operated "near 100 percent capacity" and experienced difficulties and delays in hiring skilled workers and obtaining raw materials; their inventories, however, remained adequate.

Real Estate and Construction
Activity in residential real estate markets continued at high levels but softened in some areas, while demand for commercial real estate increased further. The pace of home construction and sales was rapid throughout the District, and home prices rose further in most areas. However, these and other indicators, such as time on the market, reflected a slower pace of growth or reduced activity in some areas, notably Southern California and the San Francisco Bay Area. In other areas, residential real estate markets showed little or no sign of cooling, and conditions reportedly heated up further in some markets, such as Oregon and especially Hawaii. On the commercial side, office vacancy rates fell and rents continued to rise in most major markets. Increasing demand for commercial structures offset declining residential construction in some areas, helping to keep construction activity at high levels overall. Consequently, contacts reported scattered shortages and high prices for some construction materials, such as steel and cement, along with difficulties recruiting skilled construction workers in some areas.

Financial Institutions
District banking contacts reported generally steady loan demand and very good credit quality during the survey period. Lending to businesses increased somewhat, while mortgage originations and residential construction loans were stable to down slightly on net. Indicators of credit quality, such as loan delinquencies, have achieved unusually favorable levels in some areas. However, a very competitive environment and narrow interest rate spreads reportedly held down profit margins in the banking sector.

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Last update: January 18, 2006