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Federal Reserve Districts

Twelfth District--San Francisco

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The Twelfth District economy posted further modest improvement during the reporting period of early April through the end of May. Despite rising prices for some non-oil commodities, price increases for final goods and services remained restrained, and upward wage pressures were largely absent. Demand for retail items and services continued to strengthen, but sales remain well below pre-recession levels. Manufacturing activity in the District continued to firm, with additional improvement noted in sectors such as wood products and metal fabrication, which have been among those most troubled. Agricultural producers reported solid sales, while demand was mixed for providers of natural resource products. Demand for housing appeared to hold largely steady, but conditions in commercial real estate weakened further. Banking contacts reported stable to slightly increased lending activity.

Wages and Prices
Upward price pressures remained limited on net during the reporting period. While the price of oil came down in recent weeks, the prices of other selected commodities, such as steel, copper, and concrete, rose. Additionally, contacts continued to report price increases for transportation services. Given the weak overall level of demand, however, the final prices for a wide variety of retail items and services continued to be held down.

Upward wage pressures were largely absent, although reports continued to point to notable increases in employee benefit costs. Compensation gains remained constrained by high unemployment and limited hiring throughout the District. Compared to the same period a year ago, the majority of respondents expect wages to remain largely stable or rise slightly in the second half of 2010, while they anticipate that benefit costs, especially for health insurance, will increase more significantly.

Retail Trade and Services
Retail sales remained somewhat lackluster on net but continued to improve modestly. Both traditional department stores and discount chains reported additional increases in sales, and although consumers remained focused on necessities, contacts noted further increases in demand for some nonessential items and higher-priced options. Sales remained strong for grocers and continued to improve for sellers of furniture and household appliances. Similarly, retailers of home remodeling supplies and equipment saw robust levels of activity. Sales of new automobiles improved a bit further during the reporting period, although contacts cautioned that demand has slipped somewhat in recent weeks.

Demand for services showed further signs of improvement but remained weak overall. Providers of health-care services reported relatively steady levels of activity, while energy utilities reported increased demand from households and from firms in selected industries, such as technology and wood products. Similarly, restaurants and other food-service firms noted continued modest increases in demand. Sales remained sluggish for providers of professional and media services. Conditions continued to improve in the tourism and leisure sector: Contacts in many of the District's major markets reported increases in visitor volumes and hotel occupancy rates, and, notably, reports pointed to positive developments in business travel and convention activity.

District manufacturing activity picked up further on balance during the reporting period of early April through the end of May. Conditions continued to improve for manufacturers of semiconductors and other information technology products, with balanced inventories and high levels of capacity utilization noted. An extensive order backlog generally held production rates at a steady pace for makers of commercial aircraft and parts, although new orders continued to be limited. Capacity utilization remained at very low levels for companies in the metal fabrication and wood product sectors, but further modest improvement in demand was reported. Food manufacturers witnessed continued growth in new orders and sales with high levels of capacity utilization.

Agriculture and Resource-related Industries
Demand stayed solid for agricultural producers but was mixed for extractors of natural resources used for energy production. Sales held largely steady for a variety of crop and livestock products, and reports from agricultural contacts indicated little change in input costs. Oil extraction activity decreased somewhat in recent weeks as the price of oil declined. Meanwhile, despite high levels of inventory, extraction of natural gas increased modestly as demand showed signs of firming.

Real Estate and Construction
Demand for housing in the District appeared to be little changed from the previous period, while demand for commercial real estate deteriorated a bit further. Home prices continued to edge up in some parts of the District, and although the pace of home sales remained mixed across areas, it appeared largely stable on net. However, contacts continued to note that the limited availability of nonconforming "jumbo" loans has restricted sales of higher-priced homes in some areas. Scattered reports pointed to some modest improvements in residential construction, most notably in the repair and remodel sector. Conditions worsened somewhat further in commercial real estate markets, with vacancy rates for office and industrial space edging up in many parts of the District. However, contacts reported continued improvements in leasing activity for some market segments of the District as tenants seek to secure favorable terms.

Financial Institutions
Reports from District banking contacts indicated that loan demand was largely stable or slightly up compared with previous reporting periods. Businesses' cautious attitudes towards capital spending continued to restrain commercial and industrial loan volumes; however, reports indicated a pickup in loan demand coming from selected businesses that are planning to replace worn or outdated equipment and software. Demand for consumer loans remained weak on net. Lending standards continued to be relatively restrictive for consumer and business lending, although reports suggested that credit quality may be stabilizing. Going forward, continued modest improvement in commercial and industrial loan demand seems likely; overall, respondents expect capital spending in equipment and software to increase further in the second half of 2010, although capital spending in structures is anticipated to remain lackluster.

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Last update: June 9, 2010