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Federal Reserve Districts

Twelfth District--San Francisco

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Economic activity in the Twelfth District appeared to pick up slightly during the reporting period of December through the beginning of January. Upward pressures on prices were quite modest, and upward pressures on wages were virtually nonexistent, despite sustained productivity gains in some sectors. Holiday season retail sales were up from the preceding year but were slow compared with prior years, while demand for services remained weak on net. Manufacturing activity continued at very low levels for some product lines but appeared to improve further on balance. Agricultural producers reported solid sales, while demand was mixed for providers of energy resources. Conditions in housing markets appeared to be largely stable, but demand for commercial real estate continued to deteriorate. Contacts from financial institutions reported mostly stable loan demand and further declines in credit quality.

Wages and Prices
Upward price pressures were quite limited during the reporting period. Commodity prices in general were stable, although contacts noted increases for selected commodities such as natural gas, aluminum, and zinc. Substantial discounting continued to hold down final prices for a variety of retail items, and persistently weak demand further reduced the prices for various services, notably lodging and professional services.

Upward wage pressures were largely absent, as compensation gains were held down by high unemployment and limited hiring in most sectors and regions. The majority of contacts expect that the pace of productivity improvements achieved in their respective industries over the past year will continue in 2010; they therefore expect hiring to remain subdued for a prolonged period, even if product demand improves.

Retail Trade and Services
Retail sales improved modestly but remained somewhat weak on net. Discount chains and traditional department stores alike reported that holiday season sales were up slightly compared with 2008, although contacts in general cautioned that sales were still well below the levels recorded in 2007 and prior years. Consumers continued to emphasize necessities and lower-priced options for many types of consumer goods. However, further demand improvements were noted for some nonessential and higher-priced items, including furniture and household appliances. Sales of new automobiles remained very weak overall, although improvements in demand were noted for larger vehicles such as SUVs. Sales of used automobiles strengthened, reportedly spurred in part by price declines arising from increased supplies of formerly leased or rented vehicles.

Demand for services continued to be weak overall. Sales slid further for providers of professional services, notably advertising and accounting, and providers of real estate services such as title insurance reported that activity was largely stable at low levels. By contrast, providers of health-care services reported improved demand and increased patient volumes during the reporting period. Travel and tourism activity in the District was mixed: contacts in Southern California and Seattle noted that occupancy rates were down, while contacts in Hawaii and Las Vegas pointed to further improvements in visitor volumes. Activity was especially sluggish in the business travel segment of the market, which continued to place downward pressure on airline passenger volumes and traffic.

District manufacturing activity was mixed but showed modest improvement on net during the reporting period of December through the beginning of January. Manufacturers of semiconductors reported further strengthening in demand, with rising sales and balanced inventories noted. Makers of commercial aircraft and parts saw limited new orders, but an existing order backlog combined with a decline in delivery deferrals kept production activity largely stable at moderate levels. By contrast, production activity remained at extremely low levels for metal fabricators, for whom demand has been very weak for an extended period. Manufacturers of housing products such as windows and doors also reported that new orders remained very low, causing them to keep inventories unusually lean. Similarly, production activity at petroleum refineries remained well below the five-year average as producers attempted to reduce excess inventories.

Agriculture and Resource-related Industries
Demand for agricultural products was solid, with further sales gains noted, while demand was mixed for extractors of natural resources used for energy production. Sales expanded for assorted crops, and inputs remained readily available with generally stable prices noted. The lower exchange value of the dollar caused overall demand and prices to rise for selected commodities with extensive overseas markets, such as cotton. Oil extraction activity remained at low levels as the price of oil slid a bit. By contrast, demand for natural gas rose in response to the onset of cold winter weather in much of the District, prompting reactivation of some dormant wells.

Real Estate and Construction
Demand for housing appeared to be largely stable, while demand for commercial real estate eroded further. After accounting for normal seasonal variation, the pace of home sales was mixed across areas but appeared little changed on net compared with the previous reporting period; contacts noted that low mortgage interest rates helped to sustain sales in general. However, an extensive supply of foreclosed properties in some areas caused inventories to remain somewhat elevated, which in turn has restrained the pace of new home construction. Demand weakened further for commercial real estate, with vacancy rates for office and industrial space rising further in many parts of the District. However, one contact in the Pacific Northwest noted that the market may be approaching a bottom, citing an increase in leasing activity in response to favorable terms for tenants.

Financial Institutions
District banking contacts reported that loan demand was largely stable compared with the prior reporting period, while credit quality declined further. Demand for commercial and industrial loans continued to be restrained by businesses' uncertainty about the economic environment and resulting caution in their capital spending plans. Demand for consumer loans also was characterized as largely unchanged at low levels. Contacts reported additional loan losses and continued tight standards for business and consumer lending. Further small improvements in venture capital funding and IPO activity were noted.

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Last update: January 13, 2010