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Federal Reserve Districts

Twelfth District - San Francisco

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Reports from contacts indicate solid expansion of the Twelfth District economy in recent weeks, although signs of moderation were apparent in some sectors. Sales of services and retail merchandise were strong. District manufacturers reported generally solid conditions, although weaker demand was evident in a few sectors. Conditions among District agricultural producers were mixed, as demand conditions were stronger for ranchers than for growers. Real estate market and construction activity slowed a bit in the Pacific Northwest and Intermountain states but remained very strong in California and Arizona. District financial institutions reported somewhat tighter credit conditions. Labor markets remained tight in most areas, and elevated energy costs were passed on to the prices of transportation services and petroleum-based products.

Wages and Prices
Respondents from all District states except Hawaii reported tight labor markets across the board. Difficulties in recruitment and retention have been most acute for workers with computer, technical, and financial skills, but contacts also noted shortages of retail workers and increased turnover in agricultural labor markets. Wage increases reportedly picked up a bit in some areas of the District, and employers' benefits costs have been rising rapidly.

In regard to price developments, sustained high prices for oil and other energy sources have raised producers' costs in recent weeks and have been passed on to the final prices of some goods and services. The prices of petroleum-based materials such as containers, plastic bags, and fertilizers have increased, raising costs for manufacturers, retailers, and agricultural producers. Airlines and trucking companies have raised passenger airline fares and shipping rates in response to high fuel costs. Apart from these items, however, materials costs and final prices of goods and services remained fairly stable, due to competitive pressures and productivity gains.

Retail Trade and Services
Demand for retail merchandise expanded further in recent weeks. Sales of food, beverages, and pharmaceuticals were rapid throughout the District. Department store and apparel sales picked up somewhat, and price discounting was less evident in California; inventories generally were at or near targeted levels, with respondents noting that new computer technologies have improved inventory management. Reports regarding District vehicle sales were mixed; for example, an Idaho respondent reported weakened demand for new vehicles, but a Utah contact noted continued rapid sales growth for popular sport utility vehicles and light trucks.

Demand for services to businesses and households grew substantially in most areas. Sales growth has been especially rapid for telecommunications and Internet-related services, although contacts in California and Washington reported difficulty obtaining electronic telecommunication equipment, such as switches and fiber optic cable, to support further expansion. Demand for transportation services--both for passengers and for shipping--remained robust. Visitor arrivals to Hawaii picked up further, but in Utah hotel occupancy rates and revenues declined somewhat, as growth in the supply of hotel rooms has outpaced demand there.

Manufacturing contacts reported solid conditions overall, although weakened demand was evident in some sectors. Semiconductor manufacturers experienced strong demand and very high rates of capacity utilization; continued rapid growth in productivity enabled them to expand output while prices remained flat or declined. Demand strengthened somewhat for District machine tool manufacturers, reportedly due in part to declining import competition associated with an increase in East Asian domestic demand. However, sales of farming machinery weakened. In the Pacific Northwest, lumber orders were sluggish and prices fell significantly, but orders for wood pulp increased further, causing prices to rise and keeping inventories low. New orders and shipments of Boeing aircraft reportedly were flat.

Agriculture and Resource-Related Industries
Conditions for District agricultural producers were mixed during the most recent survey period. District beef producers reported further increases in demand and prices, although ranchers in Arizona and Oregon were hampered by dry pasture conditions and rising hay prices. In California and the Pacific Northwest, agricultural output was high due to favorable weather conditions and productivity enhancements associated in part with new information technologies. Despite increased demand from East Asia, prices on many agricultural commodities remained low as supply growth matched demand growth.

Real Estate and Construction
Construction activity and demand for residential and commercial real estate remained strong overall, especially in California, although slowing was evident in some states. Contacts in Oregon, Utah, Idaho, and Alaska reported slower home sales and price appreciation, and respondents in several areas noted that increased mortgage rates have restrained activity in residential markets more than commercial markets. While home sales and home construction have slowed from their previously rapid pace in the Portland and Seattle areas, demand for commercial real estate has remained strong, especially in Seattle. Residential and commercial markets were vibrant throughout Arizona and California, with extremely rapid increases in commercial lease rates evident in the San Francisco Bay Area. Demand for residential real estate strengthened further in Hawaii, reportedly due in part to demand for vacation homes by residents from states such as California.

Financial Institutions
Contacts from District financial institutions reported some tightening of credit availability and slightly weaker loan demand in some areas, mainly for real estate loans. Respondents from Washington, Oregon, and Idaho reported declining demand for residential and commercial mortgages. Contacts also noted slower deposit growth at California community banks, and credit availability reportedly has tightened for agricultural producers there. A Hawaii contact reported no significant changes in overall loan demand there, despite a slight pickup in consumer lending.

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Last update: June 14, 2000