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Federal Reserve Districts

Twelfth District - San Francisco

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Reports from contacts indicated continued strong performance by the Twelfth District economy in recent weeks. Labor markets were tight in most areas, and respondents reported increased upward pressure on wages and total compensation. High oil prices led to increases in petroleum-based goods prices, as well as higher costs in the transportation and agriculture sectors. In addition, some contacts noted increases in the price of natural gas at the wellhead and in the prices of paper-based goods. Otherwise, materials costs and final product prices remained fairly stable. District manufacturers, retail trade contacts, and service providers reported strong demand and no capacity constraints or material shortages. Activity in real estate and construction markets remained vigorous, but growth slowed a bit in some areas during the most recent survey period. Financial institutions reported strong loan demand and good credit quality.

Wages and Prices
Contacts throughout most of the District reported tight labor markets at all skill levels and greater upward pressure on wages and other forms of compensation. Reports of difficulties recruiting and retaining workers with computer and other technical skills were especially prevalent. Seattle and San Francisco contacts mentioned heavy competition for such workers from Internet-related firms. Contacts also mentioned shortages of other types of employees, including middle managers and entry level workers. A respondent in the retail trade sector reported receiving only two applications for over 20 job openings at a new store. Contacts in various states' manufacturing, agriculture, real estate, transportation, retail trade, financial services, and energy industries cited larger wage increases than in the recent past, both for entry level and experienced workers. Respondents also described an increase in the use of a diverse set of methods for recruiting and retaining employees, such as increases in overtime compensation rates, increases in stock options, employee loans, and cash bonuses for referrals, hirings, retention, and performance.

High oil prices boosted prices for air, water, and ground transportation, gasoline, and some petroleum-based materials. Respondents stated that some District shippers are passing increased trucking costs through to their customers in fuel surcharges. One contact noted an increase in the price of natural gas at the wellhead, but this has not yet been passed through to consumers. Contacts also cited increases in pulp and paper prices in recent weeks.

Beyond these items, materials costs and final goods prices remained fairly stable during recent weeks. Contacts mentioned competitive pressures and increasing productivity as forces keeping prices from rising. A contact from the high-tech sector reported decreases in the prices of microprocessors and some memory chips.

Retail Trade and Services
District respondents reported strong demand for retail merchandise and services and no supply constraints. Contacts in the consumer electronics, gaming, and restaurant sectors noted rapid sales. Demand for radio and television advertising from "dot-com" businesses is strong. Visitor arrivals to Hawaii picked up slightly during the survey period, as increased domestic travel to the islands offset sluggish Japanese tourism. In addition, an increase in the snow pack contributed to a strong finish to Utah's ski season. One contact reported that use of the Internet is affecting competition and pricing in the retail sector.

Manufacturing contacts in most parts of the District reported robust demand. Respondents in the pharmaceutical, biotechnology, wood products, and semiconductor industries reported strong sales. An increase in foreign demand boosted high-tech sales volumes. Sales of machine tools rose relative to the same period a year earlier, although exports declined. In the state of Washington, however, commercial and defense-related aerospace orders continued to decline, as did employment in the sector. No capacity constraints or material shortages in District manufacturing were reported.

Agriculture and Resource-Related Industries
Increases in fuel costs pushed up costs in the District's agriculture and energy sectors. Respondents from the agriculture sector reported that increases in fuel costs squeezed margins, as such increases could not be passed on to wholesalers or distributors. Similarly, large price increases for natural gas at the well head have not been passed through to consumers.

Real Estate and Construction
Real estate sales and construction activity remained at high levels in most District states, although the pace of growth slowed in some areas. Condo and single-family home prices continued to increase in California, except for some parts of the Central Valley. Hawaii contacts reported increases in home resales, strong demand for construction on Hawaii, Maui, and Kauai, and increases in prices in areas where inventory was low. Oregon respondents wrote that construction of high-end homes slowed. Contacts from Arizona and Utah reported that homes were staying on the market longer, while, in Washington, residential sales activity and price appreciation slowed. In Idaho, residential construction was flat in January and February compared to a year earlier.

The commercial real estate market also is very strong in most areas of California. Contacts in the state noted that rental space and construction labor were in short supply, and rents and construction costs increased. Office rental rates in downtown Seattle increased, but construction of large, high-tech projects in Oregon slowed in recent weeks.

Financial Institutions
District financial industry contacts from California, Hawaii, Idaho, Utah, and Washington reported strong loan demand, increased deposit growth, and no significant deterioration of loan quality.

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Last update: May 3, 2000