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Federal Reserve Districts

Twelfth District - San Francisco

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Reports from contacts indicate continued strong performance from the Twelfth District economy in recent weeks. Sales of retail merchandise and services reportedly were rapid in most District states during the recent survey period and respondents noted a pickup in District manufacturing activity. Conditions among District agricultural producers were mixed, as prices improved for ranchers but remained poor for farmers. Conditions in District real estate markets were strong overall, although slower home sales tempered growth in construction in some states. District financial conditions remained healthy, and competition for quality borrowers continued to be intense. Throughout the District, respondents reported difficulty finding and keeping qualified entry-level and skilled workers.

Business Sentiment
District respondents expect continued strong performance in the national economy and their respective regional economies during the next four quarters. Most respondents expect national GDP growth to return to its long-run average pace, leaving the national rate of unemployment at or near its current level. Still, an increasing number of respondents expect inflation to edge up in coming quarters. Although one-half of District respondents still expect economic growth in their region to outpace growth in the national economy over the next year, a growing number of respondents expect growth in their region to slow to the national pace. Most respondents anticipate little change in the strength of business investment and consumer spending in their areas. In contrast, nearly two-thirds of District respondents expect housing starts to slow in coming months, a larger share than in the previous survey.

Retail Trade and Services
Sales of retail merchandise reportedly were rapid in most District states during the recent survey period. Respondents noted robust sales of food, pharmaceuticals, home furnishings, home electronics, and appliances. In contrast, sales of apparel slowed in recent weeks, as unseasonably warm weather damped shoppers' appetites for fall and winter fashions. Retailers commented that inventory levels were generally sufficient, with few problems obtaining merchandise from suppliers. However, respondents noted that wholesale prices are rising on several types of products, most notably food and pharmaceuticals. Conditions among District service providers remained strong in recent weeks. Respondents reported robust demand for telecommunications, Internet-related services, and cable television services. Demand for shipping and freight services increased in many District states, as exports to East Asia continued to improve. In contrast, growth in tourism slowed in Utah and Southern California, boosting hotel vacancy rates in those areas.

Throughout the District, respondents mentioned difficulty finding both entry-level and skilled retail trade and service employees. Moreover, training times and employee turnover are increasing. Respondents noted that many firms are paying existing employees commissions for finding new hires and that signing bonuses, stock options, and year-end bonuses are now a must in hiring skilled information technology workers.

Manufacturing contacts throughout the District experienced solid gains, as expansions in petrochemical production, paper processing, and steel manufacturing augmented ongoing growth in high-technology equipment manufacturing. Rapid growth in demand for year-end publications and business and government forms apparently has increased orders for paper products in recent weeks, raising prices and producing occasional shortages of materials, such as titanium dioxide, the primary whitening pigment for paper. Respondents reported that orders for domestic steel products rose in recent weeks. Demand for telecommunications and computer equipment remained strong and respondents noted that order backlogs are growing. Respondents pointed out that supplies of several key inputs to high-tech manufacturing, most notably memory chips, were interrupted by the recent earthquakes in Taiwan. Decreased supply has boosted chip prices, but according to respondents, higher input prices have not been passed on to final sales prices.

Agriculture and Resource-Related Industries
District agricultural producers reported mixed conditions during the most recent survey period. Conditions for cattle ranchers continued to improve in recent weeks. Beef producers have benefitted from strong sales, increased prices, and stable costs. Conditions also have been favorable for District dairy, stone fruit, citrus, avocado, and rice producers. In contrast, low commodity prices and poor growing conditions continue to affect wheat, cotton, sugar beat, and vegetable growers. Respondents throughout the District reported significant difficulties obtaining seasonal agricultural workers.

Real Estate and Construction
Real estate construction and sales activity remained at high levels in most District states, although the pace of growth reportedly slowed, particularly for residential properties. Contacts in many District states noted that home sales have slowed and sales price appreciation has decelerated from earlier in the year, tempering growth in new residential construction. The notable exceptions to the slowdown in residential markets are the San Francisco Bay Area and Phoenix, Arizona. A number of contacts noted that a slowing rise in residential rental rates, both of apartments and homes, has begun to affect speculative building in that market. Commercial real estate markets remained solid in most District states, although building permit activity reportedly is down from last year. Building materials and skilled construction workers remain in short supply throughout the District. However, respondents noted that in most cases material and worker shortages are being translated into longer completion times rather than higher prices and wage rates.

Financial Institutions
District financial institutions continued to report healthy loan demand and generally good credit conditions. Financing remains readily available for qualified businesses and stiff competition is encouraging lenders to offer more favorable financing terms. Comments from respondents point to continued solid credit quality, although there were scattered concerns about the health of highly leveraged businesses. Throughout the financial industry, shortages of qualified workers continued to be a primary concern, and wage and salary pressures remained high.

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Last update: November 3, 1999