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Federal Reserve Districts

Twelfth District--San Francisco

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The Twelfth District economy continued to expand during the survey period of September through early October, but it showed signs of further deceleration relative to the previous survey period of July and August. Price inflation was modest with the exception of substantial increases in food prices, and increases in labor compensation were moderate on net but remained rapid for selected groups of skilled workers. Sales by retailers and service providers continued to grow, but the pace of growth slowed slightly. Manufacturers and agricultural producers saw further gains in output and sales. Tighter lending standards took a toll in housing markets, exacerbating existing weakness in that sector, but demand for commercial real estate remained solid. Banks noted slower growth in overall lending activity and a larger drop in new residential mortgages than was evident in prior survey periods.

Wages and Prices
District contacts reported that price inflation was modest in general, with the primary exception of continued rapid increases in food prices. Contacts in a few areas noted that construction costs have fallen because of lower prices on selected raw materials, including wood, wallboard, and cement. Rapid price increases continued for dairy products, corn, and wheat, and the inflation rate for final prices on various foods ranged from 3 to 4 percent in most cases to as high as 7 percent for some products.

Wage pressures were moderate on net, with contacts noting only small changes in overall labor costs. Wage pressures continued to ease in Southern California because of slight loosening in labor markets this year. In many parts of the District, compensation growth remained rapid for skilled workers in finance, engineering, marketing, and some other specialized fields.

Retail Trade and Services
Reports on retail sales suggested growth on balance but at a slower pace than in the last few survey periods. Sales slowed slightly at department stores and inventories rose a bit as a consequence; luxury goods continued to perform better than lower-priced items. Demand for home furnishings fell further as the slowdown in housing markets intensified. Sales of new automobiles were reported to be sluggish, especially for domestic makes, although demand for used vehicles remained strong.

Reports from service industries indicated slightly slower demand growth than in the last few survey periods. Sales decelerated for advertising agencies and providers of media services, as weak demand for automobiles and home furnishings held down advertising expenditures by manufacturers and retailers in those sectors. Demand growth for professional services, such as accounting and consulting, also slowed. Tourism activity was mixed but positive on net; reports from Las Vegas suggested continued solid growth, while tourist visits and hotel occupancy rates have fallen slightly in Hawaii but remained high by historical standards.

Demand for products manufactured in the District grew further during the survey period of September through early October. Production activity and new orders remained very strong for makers of commercial aircraft and their suppliers. A manufacturer of industrial equipment in the Pacific Northwest reported solid sales gains and a backlog of work through the fourth quarter of this year. Demand for information technology products continued to grow at a moderate pace; semiconductor inventories were balanced and prices firmed somewhat following a sharp drop earlier this year. Sales growth remained robust for food manufacturers, while apparel makers saw largely stable demand and inventories.

Agriculture and Resource-related Industries
Agricultural producers reported further demand growth and limited supply constraints. Sales of various fruits, nuts, and vegetables were strong in volume terms, and prices generally remained stable. Some contacts noted that high grain prices have increased supply costs and posed a challenge for livestock herding, but cattle inventories were reported to be steady. Availability of agricultural labor was mixed, with shortages reported in Idaho but higher availability and a reduction in upward wage pressures noted in Arizona.

Real Estate and Construction
The slowdown in District housing markets intensified during the survey period, while demand remained strong in commercial real estate markets. Tighter lending standards for home mortgages contributed to further reductions in sales of new and existing homes in most areas. Reports from providers of title and escrow services indicated that sales activity fell as much as 40 percent in some areas during the last few months. The reduced pace of home sales has reportedly restrained price growth throughout the District, particularly for lower-priced homes, which have been most affected by changing credit terms and conditions in the subprime-mortgage market. In contrast to housing markets, demand for commercial real estate advanced further, and positive absorption continued in most areas despite the availability of substantial new construction. The main exception to strong conditions for commercial real estate was in Las Vegas, where the market for office space was described as "soft" due to growth in newly built space that has outstripped demand.

Financial Institutions
District banking contacts reported that overall loan demand grew but at a reduced pace compared with the past few surveys. Reports on commercial and industrial lending and consumer lending suggested stability or modest growth during the survey period, although scattered reports pointed to a decline in loan volumes. The decline in mortgage lending deepened as a result of tighter lending standards for most types of mortgages and increased rates on "jumbo" mortgages. Delinquencies and defaults increased a bit further for home mortgages, but credit quality otherwise was described as quite favorable.

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Last update: October 17, 2007