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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 survey period of early June through mid-July. Overall price inflation was modest; labor compensation rose moderately overall, although upward pressure remained strong for selected worker groups with specialized skills. Reports on retail sales were mixed, while service providers saw further sales gains but at a reduced pace in some cases. Manufacturers' reports pointed to expansion on net, and agricultural producers saw solid demand growth. Housing market activity was weak overall and slowed further in many areas, while demand for commercial real estate continued to firm. Banks reported growth in loan demand with the exception of residential mortgages.

Wages and Prices
Reports from District contacts indicated that price inflation was modest overall. Increases in the costs of energy and selected commodities and raw materials created significant upward price pressures in some sectors, especially for food producers and providers of transportation services. By contrast, upward price pressures eased for products that use stainless steel, due to a sharp drop in the price of nickel, one of its key components. Also, ongoing price declines for products in very competitive markets, notably apparel, electronic goods, and computer services, helped to hold down overall inflationary pressures.

Growth in labor compensation continued at a moderate pace overall. The reports in general were mixed, with some contacts in areas with especially tight labor markets pointing to a recent pickup in wage growth and some contacts in other areas pointing to moderation. Wages continued to grow at a brisk clip for selected worker groups with specialized skills, such as engineers and some occupations in the financial services sector.

Retail Trade and Services
Reports on retail sales were mixed. Department stores and major retail chains reported moderate sales gains relative to a year earlier, although inventories have risen of late. Demand remained sluggish for furniture and products used for home improvement, with widespread sales declines noted, while high prices for retail gasoline reportedly reduced consumers' purchasing power and limited spending a bit more generally. High gas prices also reportedly held back new vehicle sales, which were little changed from the previous survey period. By contrast, sales of used vehicles were strong and their sale prices firmed, partly as a response to a reduced supply of used cars from car rental agencies.

Sales by service providers continued to expand on net, but the pace moderated in some cases. Growth remained especially rapid for providers of health-care services, and it picked up for some providers of computer services, but it slowed for some categories of professional services. Travel and tourism activity was at a high level overall, although reports from various areas suggested weakness in foreign tourist activity despite relative strength in foreign currencies. Tourist activity in Hawaii picked up somewhat of late, but growth in domestic tourist visits and spending have been largely offset by the reduced number of visitors from Japan this year.

Demand for District manufactured products expanded on net during the survey period of early June through mid-July. Increases in already large order backlogs kept producers of commercial aircraft and their suppliers operating at or near full capacity, and demand picked up a bit for products related to national defense. Apparel and food manufacturers reported solid sales gains, while makers of industrial equipment continued to report "steady" conditions. Contacts noted that sales of exported items generally grew at a more rapid pace than earlier this year, due in part to a reduction in export prices arising from the lower foreign exchange value of the U.S. dollar. By contrast, sales fell further for makers of building materials, household appliances, and furniture. Conditions were largely stable for makers of information technology products; semiconductor sales were up slightly in unit terms compared with the same period last year, but capacity utilization remained a few points below its level from early 2007.

Agriculture and Resource-related Industries
Demand for agricultural products continued to grow and supply conditions were largely favorable. Contacts reported robust sales growth and higher prices for most commodity and specialty crops, notably corn used in ethanol production, compared with the same period a year ago. Contacts also noted that export sales have grown substantially of late, as overseas buyers have responded to favorable exchange rates. Input supply generally was stable, although refrigerated shipping capacity has dropped and prices have risen substantially.

Real Estate and Construction
Activity in District housing markets slowed further on net, while demand for commercial real estate rose. In most areas, average time on the market rose and sales of new and existing homes remained low or fell. The slowdown has expanded to encompass areas where housing markets had remained hot into early 2007, such as parts of Utah and Idaho; however, prices continued to rise in areas where local economic conditions remain strong, such as those states plus Hawaii and the Seattle area. On the commercial side, vacancy rates for office and industrial space edged down and rental rates rose further in most District cities. Construction activity for commercial and public projects expanded in some areas, partly offsetting declines in residential construction activity and keeping the supply of construction labor and materials somewhat tight.

Financial Institutions
District banking contacts reported that loan demand grew further, with the exception of residential mortgages. Declining demand for residential mortgages was offset by growing demand for commercial lending, including commercial real estate loans. Although credit quality was at favorable levels overall, it continued to deteriorate for home mortgages, primarily for subprime mortgages in areas where house values have dropped over the past year. In response, mortgage lenders have tightened underwriting standards.

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Last update: July 25, 2007