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Federal Reserve Districts

Twelfth District--San Francisco

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The Twelfth District economy expanded during the survey period of late July through late August, but the reports suggest that the momentum has slowed a bit. Price pressures were limited overall, and upward pressures on labor compensation were moderate on net, although they remained strong for selected groups of skilled workers. Sales by retailers and service providers were uneven, with the reports suggesting modest growth on balance. Manufacturing activity expanded further, and agricultural producers saw solid sales gains and generally stable supply conditions. Housing market activity slowed further in most areas, and most contacts from this sector expect further sales declines in coming months due in part to more restrictive credit standards and higher interest rates for residential mortgages. Demand for commercial real estate continued to grow. Banks and other financial institutions reported growth in loan demand but some pullback on credit availability, primarily for residential real estate transactions.

Wages and Prices
Reports from District contacts indicated that price inflation was modest overall. Upward pressures eased for some manufacturers and service providers as prices for energy and some raw materials fell, but significant price increases continued for food products. Increases in final prices to consumers reportedly were restrained by vigorous competition, with scattered reports pointing to reduced profit margins rather than price increases in response to cost pressures.

Wage pressures were moderate on net, with contacts noting only small changes in overall labor costs. Scattered reports suggested some easing in upward wage pressures, such as in the Los Angeles area, where labor markets have loosened slightly this year. Shortages of some types of skilled labor, especially engineers and selected groups in the financial and professional services sectors, have kept wage increases rapid for these groups; such skill shortages reportedly have reduced some employers' ability to increase overall productivity.

Retail Trade and Services
Reports on retail sales were mixed and suggested modest growth overall. Contacts noted that sales growth remained solid for luxury items and for higher-end retailers in general, but sales were weak for discount chains. The slowdown in housing markets in most areas has caused sales of household items to fall, with especially large drops for furniture and smaller but significant declines for appliances. Sales of new vehicles reportedly weakened further, especially for domestic makes. By contrast, demand for used vehicles remained strong and sales grew accordingly, despite a reduced supply of used vehicles from rental car companies.

Service providers saw further demand growth on net but with slowing evident in some sectors. Demand continued to grow at a strong pace for providers of health care, media, technology, and various professional services. However, activity fell further for providers of services related to home sales, such as real estate agencies and title companies. Growth in tourist activity has slowed in major District markets: it was flat to down in Hawaii and largely flat in San Francisco and Los Angeles, reportedly due to growing consumer caution in the latter city. Reports on productivity growth were mixed in the services and retail sectors, with some contacts indicating a reduction in their ability to capture gains from new technologies and organizational efficiencies and others reporting substantial payoffs to ongoing investments in those areas.

Demand for District manufactured products expanded on net during the survey period of late July through late August. Production activity and sales remained very strong for makers of commercial aircraft and their suppliers. Manufacturers of information technology products saw further modest gains in sales and capacity utilization relative to earlier this year, while makers of industrial equipment continued to report "steady" conditions. Food manufacturers reported strong growth in sales. By contrast, demand fell further for manufacturers of building materials, furniture, and household appliances, and apparel makers noted a recent decline in sales relative to a year earlier. Various manufacturing contacts reported that productivity gains have continued at their previous trend rate thus far in 2007, due to the introduction of new production techniques and ongoing growth in product demand.

Agriculture and Resource-related Industries
Demand for agricultural products continued to grow and supply conditions were largely favorable. Sales growth was strong for most row and tree crops and yields have been good. Unexpected summer rains helped to improve grazing conditions for cattle ranchers in the Southwest. Some agricultural contacts reported that pressures on input costs eased overall, but others noted that prices of feed grain increased further and labor availability tightened in some areas.

Real Estate and Construction
The District's housing market slowdown continued, while activity in commercial real estate markets rose further. The slide in home sales and building activity continued in most parts of the District, and sales prices for new and existing homes were flat to down slightly. Most contacts from this sector expect further sales declines in coming months, due in part to more restrictive credit standards and higher interest rates for residential mortgages. By contrast, construction and leasing activity for commercial and industrial space grew further and vacancy rates have reached low levels in some cities, most notably Los Angeles and Las Vegas. Moreover, in the Pacific Northwest and Utah, rising construction activity for commercial and public works projects has fully offset declining residential construction activity, keeping overall construction employment stable or growing this year.

Financial Institutions
District banking contacts reported that loan demand grew on net, but the slide in mortgage lending deepened due in part to more restrictive credit conditions. Commercial lending activity grew in most areas, although a few contacts noted slower growth late in the survey period. Contacts reported a sharp shift towards tighter credit standards and higher interest rates for residential real estate lending; the shift was largely limited to this one sector, although contacts also provided scattered reports of a more general tightening in credit availability. Lending activity for commercial real estate projects continued at very high levels, and some banks reportedly are approaching regulatory limits on loan concentrations for this segment.

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Last update: September 5, 2007