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Federal Reserve Districts

Twelfth District--San Francisco

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Economic activity in the Twelfth District continued to grow at a moderate pace on net during the survey period of January through late February.  Upward price pressures remained modest and eased further in some sectors, despite slightly faster growth in labor costs on net.  Retailers reported modest sales gains, with robust gains reported for service providers.  Manufacturers and agricultural producers also reported demand growth, although significant supply constraints were noted for some crops.  District housing markets cooled further, while conditions in commercial real estate markets continued to firm.  Banks reported additional growth in loan demand, albeit at a reduced pace in some areas.

Wages and Prices
Upward price pressures were mixed across sectors but remained modest on net.  Past and ongoing declines in the costs of energy and selected raw materials have reduced inflationary pressures in a variety of industries, such as agriculture, transportation, and electronics.  Contacts in these and other industries noted that upward price pressures have been restrained in part due to availability of inexpensive imports and global sourcing of intermediate goods and services.  By contrast, the prices of selected inputs used in food processing have increased significantly, causing producers to raise prices in that industry.  

Growth in labor compensation inched up relative to the previous survey period but remained moderate overall.  Recent increases have been driven primarily by compensation components other than base wages and salaries, such as bonus payments and rising costs for health-care benefits.  Compensation growth continued to be more rapid for some worker groups with specialized skills and in areas with very tight labor markets, notably Idaho and Hawaii.

Retail Trade and Services
District retailers reported modest increases in sales during the most recent survey period.  Sales of most retail items increased in dollar and unit terms compared with the same time last year.  However, sales of furniture and items used for home improvement have fallen along with activity in residential real estate markets.  Sales of new automobiles reportedly were flat, with continued strong sales of imported vehicles largely offsetting tepid sales of domestic models.  Inventories of domestic light trucks and SUVs remained at high levels.

Most service providers saw robust demand, with especially strong conditions noted for food and beverage, health-care, technology, and legal services.  Travel and tourism activity was at high levels and grew further in some regions, notably in the San Francisco Bay Area.  However, tourist visits have leveled out in Hawaii, as significant declines in visits by foreign tourists have offset continued moderate growth in domestic tourism; contacts there reported that hotel occupancy rates have fallen relative to a year earlier. 

District manufacturers reported further growth in demand and sales for the survey period of January through late February.  Semiconductor sales expanded at a solid pace, and capacity utilization in the sector generally remained in the range of 90 percent; industry forecasts point to a slight pickup in growth in 2007.  Producers of commercial aircraft and defense products saw further growth in orders and continued to operate near full capacity to meet existing backlogs.  Makers of machine tools reported that the pace of orders was largely consistent with the previous period, while food manufacturers reported strong growth in orders.  In contrast, demand for wood products and other building materials used primarily in residential construction fell further. 

Agriculture and Resource-related Industries
Demand for agricultural and resource-related products grew further.  Sales of most crops and dairy products expanded and prices in general remained firm.  However, California spinach producers have been struggling with weak demand, which has been held down by lingering concerns about food safety arising from crop contamination in September.  In addition, a recent severe cold snap in that state severely damaged citrus, avocado, and some vegetable crops, reducing output and raising their prices significantly.  On the resources side, producers of oil and natural gas reported generally strong demand and high levels of capacity utilization, although one provider of natural gas reported that demand growth has been held down of late by slower sales of new homes.

Real Estate and Construction
Residential real estate markets cooled further in most parts of the District, although contacts noted scattered signs of stabilization in market conditions.  In most areas, sales of new and existing homes fell further, and the inventory of available homes rose accordingly.  In response, price appreciation for new and existing homes has slowed, with noticeable price declines in some areas of late, and residential construction activity has dropped substantially.  Contacts in some parts of the District, notably in California, reported signs of market stabilization, in the form of a reduced rate of deterioration in market conditions; however, other reports indicated that the deterioration has not abated in hard-hit areas such as Arizona.  On the nonresidential side, in a continuation of existing trends, vacancy rates generally fell and rental rates rose.  Construction activity for commercial and public projects grew further, largely offsetting the decline in residential construction activity, though the pace of growth for nonresidential construction reportedly has fallen compared with last year.  

Financial Institutions
Contacts in the banking sector reported further growth in loan demand but at a slower pace than in recent survey periods.  Growing demand for commercial and industrial loans largely offset further weakening in demand for residential loans, though some contacts noted a resurgence of refinancing activity as consumers switched from variable-rate to fixed-rate mortgages.  A few contacts reported signs of deteriorating credit quality, such as an increase in nonperforming consumer loans, but credit quality in general remained at favorable levels.

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Last update: March 7, 2007