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Federal Reserve Districts

Twelfth District - San Francisco

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Contacts reported that economic activity slowed during the survey period of September through early October, as the negative repercussions of the September 11 terrorist attacks added to underlying weakness in many sectors. Upward pressure on wages and prices was limited overall, with price declines or discounts noted for gasoline, travel-related services, and some categories of retail goods. Retail and travel spending dropped precipitously during the week of September 11, then recovered noticeably but generally remained below respondents' pre-attack expectations. Production and employment in most manufacturing sectors fell, and firms held back on investment. Ample supply and low prices were reported for most agricultural products. Demand for real estate and construction activity fell in most areas, with some projects facing financing and insurance obstacles. Loan demand at banks weakened somewhat, especially for business loans.

Wages and Prices
Wages and final prices of goods and services exhibited little or no upward movement on average, with price declines evident for some items during the survey period. Since September 11, sharp reductions in tourist and business travel have led to substantial discounts on hotel rooms and airline tickets. Respondents also noted discounts for some retail goods, especially clothing at department stores, and retail prices fell for gasoline and natural gas. By contrast, the payments for some types of insurance policies rose, and medical insurance costs reportedly were running 15 percent or more above their levels from a year ago. Wage increases were moderate, in the range of 2 to 4 percent on an annual basis. In some areas, greater availability of workers led to more downward flexibility in salary negotiations.

Retail Trade and Services
Consumer spending was weak overall during the survey period. Following a sharp drop in retail spending during the week of the attacks, reports for some areas and sectors indicated a rebound to pre-attack spending levels, although these already were somewhat weak. Other reports indicated only partial recovery, with sales generally running 5 to 10 percent below pre-attack expectations. Some department stores, which were hit hardest by the spending slowdown, commenced sizeable layoffs. By contrast, large discount chains saw solid demand, with year-over-year sales gains reported. Automobile sales fell about 50 percent during the week of September 11; by the end of September, sales had improved but remained below normal. Except for weakness on the day of the attacks, sales at grocery stores and pharmacies reportedly were strong throughout the survey period, as some consumers apparently switched from restaurant visits to home dining and continued to buy necessary medical items.

Demand for services by consumers and businesses was quite weak, as spending on travel and tourism plummeted during the weeks following the attacks. In Hawaii, tourist visits and spending were about 25 to 30 percent below normal. Airlines in general reduced flights by about 15 to 20 percent at District airports. Hotel occupancy rates, which already were running below year-earlier levels prior to September 11, fell by half or more during the week immediately following the attacks; by month-end, they had improved but remained quite low, with reported rates ranging from 10 to 50 percent below normal. Advertisers and media outlets saw reduced demand for advertising space and commercial time during the week of the attacks, which exacerbated pre-existing weakness in that sector. Firms in all of these sectors laid off large numbers of employees.

Production and employment fell further in the manufacturing sector during the survey period. Although capacity utilization reportedly held steady or increased slightly for semiconductor manufacturers, sales declines and employment cutbacks continued. Similar shrinkage was evident among makers of apparel and machine tools, and manufacturers of wood products saw a sharp decline in sales accompanied by rising inventories and falling prices. Food processing firms continued to struggle, with plant closures and bankruptcies reported in Washington, Oregon, and California. Boeing announced plans for sharp reductions in production and employment due to the expectation of ongoing weak demand for air travel in the wake of the September 11 attacks. On the upside, demand for a few high-tech products, most notably data storage and security systems and wireless communications equipment, held steady or increased in the aftermath of the attacks. Production and delivery delays were reported for many products after the attacks, although the disruptions generally were of limited duration and severity. Investment plans reportedly remain on hold in most areas as firms assess future sales prospects, with little change in plans reported as a direct result of the September 11 attacks.

Agriculture and Resource-related Industries
Agricultural contacts reported good yields and low prices on most agricultural products, with the exception of some grains. Crop yields and quality were high for tree fruits, and recent grape harvests point to double-digit growth over last year's levels in California and Oregon. By contrast, dry conditions in the Pacific Northwest restricted the supply of grains such as hay and alfalfa, and their prices were high. The supply of beef cattle to market was high, and the price was held low by weak exports to Japan and a reported decline in domestic demand for beef. Respondents provided scattered reports of shipping difficulties; limited availability of air freight during the two weeks following September 11 reduced sales of fresh produce to the East Coast, and these lost sales were not replaced later.

Real Estate and Construction
Demand for residential and commercial property eased and current and planned construction activity fell somewhat throughout the District during the survey period. Contacts in most areas reported higher vacancy rates for office and other commercial space compared to earlier in the year. Commercial construction activity had slowed prior to September 11, and uncertainty regarding financing, insurance availability, and future demand for space following the attacks put some planned projects on hold. The pace of transactions and price appreciation also moderated for residential real estate in some areas, due partly but not entirely to fallout from the attacks.

Financial Institutions
Loan demand weakened somewhat during the survey period. Respondents in several areas noted declining demand, especially for loans to businesses, and slightly increasing delinquencies. The sole exception was Southern California, where a respondent reported a resumption of solid demand following a slowdown during the week of September 11. Activities at some financial institutions were disrupted by market closures and limited availability of overnight and express mail deliveries due to security precautions in the immediate aftermath of the attacks. Brokerage firms laid off workers in some areas, due to weak conditions in stock markets.

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Last update: October 24, 2001