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Federal Reserve Districts

Twelfth District--San Francisco

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Economic activity in the Twelfth District slowed further on net during the survey period of mid-April through the end of May, although the reports again pointed to signs of stabilization or improvement in some sectors. Upward price pressures remained modest overall, and upward wage pressures were largely absent. Retail sales continued to be anemic, and demand softened further for service providers. Manufacturing activity generally remained at extremely low levels or eased further, although conditions continued to improve for makers of information technology products. Demand held largely steady for agricultural producers and remained somewhat weak for providers of natural resources. Home sales continued to firm in many areas, but construction activity stayed stuck at low levels, and demand for commercial real estate continued to deteriorate. Loan demand weakened further on net and credit availability remained tight.

Wages and Prices
Upward price pressures were very limited during the survey period. Commodity prices in general remained largely stable, except for oil prices, which increased. Final prices for a wide variety of retail items continued to be held down by heavy discounting, and the prices of selected services fell further, most notably for professional services such as accounting and business consulting. Gasoline prices rose modestly but remained well below last year's highs.

Upward wage pressures were largely nonexistent. Contacts in most sectors continued to report that they have reduced labor costs by freezing or cutting wages for many worker groups, reducing or eliminating bonus payments, and in some cases reducing their contributions to employee benefit plans. Contacts reported limited recruiting activity and ample worker availability, which put downward pressure on wage offers.

Retail Trade and Services
Retail sales remained feeble on net, but the reports suggested that they did not deteriorate noticeably compared with the preceding survey period. Consumers continued to favor inexpensive necessities over luxury items and discretionary purchases, resulting in sales gains for large discount retailers in some areas. Department stores and specialized retailers continued to see very weak demand, with little change in sales reported relative to the previous survey period. Sales expanded further for grocers but remained anemic for retailers of furniture, appliances, and electronic items. New automobile sales, especially for domestic makes, remained exceptionally weak, while sales of used vehicles reportedly returned to "normal" levels in some areas. Unit sales of gasoline were running slightly below their levels from 12 months earlier.

Demand for services continued to ease on net since the last survey period. Providers of health-care services saw further demand declines, as reflected in a drop in patient volumes. Demand continued to fall for providers of professional services such as accounting, business consulting, and legal services. By contrast, providers of real estate services such as title insurance reported substantial increases in activity, resulting from an increase in home refinancing as well as a sales pickup in some areas. Travel activity in the District fell further: in California and Nevada, pronounced ongoing declines in hotel occupancy rates were reported, especially in the luxury segment of the market, and in Hawaii, visitor counts and spending remained down by double-digit amounts from 12 months earlier.

District manufacturing activity remained at very low levels overall during the survey period of mid-April through the end of May. Activity for producers of wood products remained "depressed," with sales prices that were described as too low to cover costs for many producers. Contacts in the metal fabrication industry continued to report extremely weak demand and levels of capacity utilization hovering around 25 percent. Production activity has started to ease for aerospace manufacturers, with significant declines in new orders and growing cancellations and delivery deferrals for existing orders pointing to further declines going forward. By contrast, conditions improved further for manufacturers of semiconductors and other information technology products, as new orders and sales increased modestly, capacity utilization rose, and inventories were brought into balance. Food manufacturers saw continued growth in sales with high levels of capacity utilization.

Agriculture and Resource-related Industries
Demand remained largely stable for agricultural producers and somewhat weak for providers of natural resources. Sales continued at a solid pace for most types of agricultural output, including livestock products and various types of produce, and input costs reportedly stayed at moderate levels, notably for fuel, fertilizer, and capital equipment. Extraction activity and capital spending by oil extractors were held down by weak global demand.

Real Estate and Construction
Conditions in District housing markets remained very weak but showed some signs of improvement, while demand for commercial real estate slid lower. Elevated rates of home foreclosures, ongoing price declines, and low mortgage interest rates have combined to support a sustained pickup in the pace of home sales in many areas. However, the pace of home construction remained very slow. Demand for commercial space declined further, and with vacancy rates rising, tenants in some areas have requested and received concessions on lease rates for office and retail space. Construction activity and sales transactions for commercial real estate fell further, with contacts citing limited credit availability as one cause.

Financial Institutions
District banking contacts reported that overall loan activity weakened further and credit conditions remained tight during the survey period. Businesses continued to cut back on their planned capital investments, causing demand for commercial and industrial loans to fall further. Similarly, consumer loan volumes were reported to be down considerably in some areas. Contacts attributed declines in business and consumer loan volumes primarily to the limited number of qualified applicants, but they also noted that lending standards remained relatively stringent.

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Last update: June 10, 2009