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Federal Reserve Districts

Twelfth District--San Francisco

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Economic activity in the Twelfth District slowed further during the survey period of January through late February.  Upward price pressures continued to ease in general along with the prices of energy and other commodities, and upward wage pressures were virtually nonexistent.  Retail sales remained very sluggish with the exception of necessities such as basic groceries, and demand weakened further for service providers.  District manufacturing activity continued to decline on net.  Demand weakened for agricultural producers and fell further for oil extractors.  District housing markets remained moribund, and demand for commercial real estate continued to fall.  Contacts from financial institutions reported further weakening in loan demand and continued tight credit conditions.

Wages and Prices
Upward pressures on prices eased further during the survey period.  Declining demand reduced sellers' pricing power in many sectors, and price discounts deepened for assorted retail items.  Prices declined further for energy and many commodities, including various construction materials and food products.  Gasoline prices rose but remained well below the highs reached last year. 

Upward wage pressures remained modest to nonexistent on net.  Hiring freezes and restricted work schedules have become commonplace, and unemployment rose significantly throughout the District.  Compensation increases were very limited in general:  many employers have frozen or cut wages, eliminated incentive pay, or reduced benefit costs, for example through the elimination of 401(k) matching programs.  Reports indicate that some companies that have not yet reduced workforces or cut compensation costs plan to do so soon.

Retail Trade and Services
Retail sales remained anemic.  Consumers continued to shift away from discretionary spending and focus on necessities, reducing their overall spending and causing somewhat better performance for discount chains compared with traditional department stores.  Many retailers saw double-digit sales declines relative to 12 months earlier, although contacts in the grocery industry reported that sales have grown in recent months.  Demand remained especially weak for furniture, appliances, and electronic items.  New automobile sales, both domestic and foreign, remained feeble, but sales and prices stayed relatively firm for used vehicles.

Demand for services continued to decline since the last survey period.  Contacts in the restaurant and food services industry noted sharp sales declines accompanied by growing layoffs and closures.  Providers of health-care services saw further drops in patient volumes, attributed largely to postponement of elective procedures and cutbacks in government-funded medical programs.  Demand weakened significantly for providers of professional services such as accounting, business consulting, and legal services, with ongoing layoffs noted.  Travel activity in the District fell further, and airlines responded by reducing passenger capacity.  In Hawaii, sharp ongoing declines in visitor arrivals caused further layoffs at hotels and resorts, and contacts in Southern California reported growing cancellations of corporate travel commitments. 

District manufacturing activity languished during the survey period.  Producers of wood products, transportation equipment, and construction equipment saw further declines in demand.  New orders and sales of semiconductors and other information technology products continued to fall, causing layoffs and further reductions in capacity utilization for many firms.  Contacts in the metal fabrication industry reported very weak demand and capacity utilization rates in the range of 25 to 50 percent.  Aerospace manufacturers continued to produce commercial aircraft at a brisk clip, but reductions in airline capacity have weakened the outlook for new orders going forward, and orders for small corporate jets have dropped significantly of late.  Food manufacturers remained a bright spot, seeing strong demand overall as growing sales to grocery stores more than offset declining sales to restaurants.  Several contacts noted that an inability to raise sufficient financial capital has been hampering current operations.

Agriculture and Resource-related Industries
Demand slipped somewhat for agricultural producers and weakened further for oil extractors.  The pace of sales slowed for an assortment of agricultural products, notably livestock, dairy, and wheat.  Agricultural input costs, particularly for fuel, transportation services, and fertilizer, reportedly have stabilized at levels well below the highs established last year.  However, California farmers faced supply constraints and higher prices for water, and they expect supply to tighten further as the growing season proceeds.  For oil extractors, ongoing declines in global demand caused further reductions in sales and rising inventories. 

Real Estate and Construction
Activity in the District's housing markets remained mired at very low levels, and considerable demand declines were reported for commercial real estate.  The pace of home sales stayed very slow in most areas, despite some pickup in recent months as price declines have increased affordability, and construction of new homes was limited.  Conditions in the commercial office market deteriorated noticeably, as leasing activity slowed further and vacancy rates continued to rise.  Contacts reported that restricted credit availability has held down construction activity in both sectors of late.  Construction projects funded by state and local governments fell further during the survey period as a result of budgetary constraints.

Financial Institutions
District banking contacts reported that loan demand continued to weaken and credit conditions remained tight.  Many businesses have scaled back their capital investment plans, causing demand for commercial and industrial loans to fall further, and the market for commercial and residential real estate loans continued to wane.  Declining asset values and rising loan losses caused banks and other financial institutions, such as money management firms, to scale back activity and lay off significant numbers of employees.  Credit quality continued to deteriorate, as weakness in corporate and household borrowers' balance sheets and income statements deepened, and bank lending standards remained stringent on net. 

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Last update: March 4, 2009