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Federal Reserve Districts

Twelfth District--San Francisco

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The Twelfth District economy expanded at a moderate pace during the latest survey period. Overall price inflation remained modest, though growth in labor compensation ticked up slightly. Retail sales were solid overall and most service providers saw strong demand. Manufacturers and agricultural producers also reported robust demand for their products. Activity in District housing markets slowed further, while demand for commercial real estate grew at a modest pace. Loan demand and credit quality in the banking sector remained healthy.

Wages and Prices
On net, District contacts indicated that final prices grew at a modest pace. Input prices reportedly were stable overall, though price declines were noted for some building materials used primarily in residential construction, such as lumber and wallboard. Growth in labor compensation ticked up relative to the previous survey period but remained moderate overall. So far, the pickup in compensation growth has not translated into higher final goods prices. A number of respondents attributed limited price pressures to highly competitive environments, notably for apparel and electronic goods.

Much of the growth in labor compensation during this survey period was reported to be in non-base-wage components such as bonuses and commissions and employer-provided health-care benefits. Contacts indicated that compensation growth was considerably higher for select groups of skilled workers, notably in the health-care, finance, and technology sectors, and in areas with very tight labor markets, such as Idaho and Utah, than it was overall.

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 compared to last year. Sales growth was evident for most retail market segments, and the extent of holiday season discounting was about the same as last year. Sales growth was especially strong at department stores and establishments specializing in luxury products, with full-price items reportedly selling substantially better than last holiday season. Overall, most contacts reported that holiday sales met or slightly exceeded expectations, leaving retail inventories in balance. Turning to the auto sector, sales of new automobiles were moderate on net, with strong sales of imports offsetting muted sales of domestic models. Inventories of domestic light trucks and SUVs remained at high levels.

Most service providers saw strong demand. Sales were brisk in the food and beverage, health-care, and technology services sectors. Tourist activity remained at high levels in most major markets. In Hawaii, total tourist visits and spending were up compared to a year ago, despite declines in the number of Japanese visitors during the survey period. In most parts of the District, hotel occupancy rates remained stable, while room rates rose further.

District manufacturers reported an uptick in demand for their products in late November through the beginning of January. Semiconductor sales expanded at a solid pace, and capacity utilization in the sector generally remained in the range of 90 percent. Vigorous competition among manufacturers held down prices for various semiconductor products. Strong demand for commercial aircraft and defense products kept District producers operating at full capacity to meet ongoing order backlogs. Makers of machine tools saw continued increases in new orders but at a slightly reduced pace, and food manufacturers reported strong sales. In contrast, demand for wood products and selected building materials used primarily in residential construction contracted further.

Agriculture and Resource-related Industries
Demand for agricultural and resource-related products grew at a solid pace and production conditions were stable overall. Robust demand for livestock and most crops, such as pecans and corn, resulted in strong sales and higher prices for these items compared to a year ago. Price declines for fertilizers and freight services continued to ease pressures on production costs. In the resources sector, producers of oil and natural gas saw fairly robust demand and tight inventories overall.

Real Estate and Construction
District residential real estate markets cooled further, while demand for commercial real estate grew modestly. The pace of home sales and price appreciation deteriorated for existing and new homes in most areas during the survey period. In several previously hot areas, such as parts of Southern California and the San Francisco Bay Area, home price appreciation slowed to low single digits. District homebuilders continued to work down unsold inventory by offering significant incentives to entice buyers. Slower home sales continued to damp residential construction activity, particularly for condominiums. Continued growth in demand for commercial and industrial space was evident in further reductions in vacancy rates and increases in rental rates in most areas. Construction activity for commercial and public projects continued to expand, largely offsetting the decline in residential construction, although the pace of growth was slower than earlier in 2006.

Financial Institutions
Contacts in the banking sector continued to indicate that, on net, overall loan demand and credit quality were solid. Demand for commercial and industrial loans continued to outpace demand for residential loans, owing in large part to the drop-off in mortgage originations and refinancing. Contacts reported that indicators of credit quality, such as loan delinquencies, were at favorable levels in general. Tight labor markets for skilled workers in banking and other financial services remained a major concern; employers offered significant signing bonuses and other incentives to attract capable workers.

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Last update: January 17, 2007