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Twelfth District - San Francisco

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Economic activity remained weak during the survey period of October and early November, although signs of further deterioration in economic conditions compared with September were limited. Prices fell for some items, largely due to discounting by retailers and service providers, with little or no upward movement overall. Wage increases were limited. Retail sales and travel spending picked up noticeably compared with September but, with the exception of strong auto sales, remained weak. Manufacturing output and employment declined further. Agricultural products were in ample supply, and some producers struggled with low sales prices. Demand for commercial real estate declined in most areas, and residential real estate markets cooled, although home prices generally remained firm. Loan demand fell on net, due to weaker demand from businesses.

Wages and Prices
Upward pressure on wages and consumer prices was limited during the survey period. The prices of some items fell--most notably for energy, hotel rooms, and airline, cruise line, and tour tickets--and contacts in most areas reported widespread discounting by retailers. Wage increases were quite limited, with lower starting salaries reported in some areas; one respondent in the Pacific Northwest noted a 20 percent reduction in starting salaries for high-tech workers during the past 12 to 18 months. Contacts also provided scattered reports of salary freezes for current employees. Although labor costs associated with health benefits rose, the rate of increase was reduced somewhat by medical plans' increased reliance on lower-cost generic drugs.

Retail Trade and Services
Consumer and travel spending were weak during the survey period, with the exception of new automobile purchases. Reports generally indicated that retail sales were several percentage points below pre-September 11 or year-earlier levels, although substantial recovery compared with the second half of September was noted for all areas. Sales were especially low at restaurants and for most categories of apparel. Moreover, retailers' orders for Christmas items and their hiring activity for the early holiday season were both below normal. The exceptions to generally weak retail sales reports were provided in regard to large discount retailers, who saw flat to slightly increased sales, and auto dealers, for whom favorable financing terms generated a surge in sales. In Hawaii, retail spending reportedly was as much as 20 percent below normal, due primarily to weak visitor arrivals rather than reduced spending by residents. In that state, domestic visitor counts were well up from September but remained about 10 to12 percent below year-earlier levels, while Japanese visitor counts remained stuck at 50 to 60 percent below normal. Among signs of weak travel spending in other areas, San Diego's visitor tax revenues were down 27 percent in October compared to a year earlier, and holiday season bookings reportedly were weak in Arizona. Firms in the travel industry (including airports) laid off large numbers of employees, and a Southern California respondent noted that voluntary turnover in the travel industry was unusually low.

Service providers outside the travel industry also faced weak conditions. Business was slow for advertising, marketing, public relations, management consulting, and computer services firms throughout the District, and these firms implemented significant job cuts. Providers of telecommunications services, including high-speed Internet services, also faced weak demand.

Manufacturing activity contracted further during the survey period. High-tech manufacturers reduced their inventories, bringing them closer to preferred levels, and semiconductor prices reportedly stabilized at very low levels. However, sales of high-tech equipment fell and substantial layoffs continued in that sector throughout the District. Demand for wood products fell sharply in October, and sales of other construction-related materials such as paint and coatings reportedly were 3 to 5 percent below year-earlier levels. Apparel makers have worked down their inventories somewhat, but production capacity was underutilized due to weak demand. Job cuts were widespread in manufacturing, including the onset of Boeing's extensive planned cuts in the Seattle area and Southern California.

Agriculture and Resource-related Industries
Conditions in agriculture changed little, with ample supply and low prices as dominant factors. Demand was solid for most agricultural products, as strong sales to supermarkets reportedly offset substantially depressed sales to the food services industry (primarily restaurants). Growers of fruits, vegetables, and other field crops worked down inventories somewhat, but prices remained quite low, especially for cotton. An Arizona contact reported low prices and losses of $200 per head on beef cattle. By contrast, due to tighter supply than in past years, the prices of grains and potatoes increased, benefiting suppliers in Idaho and the Pacific Northwest. In California, the supply of agricultural labor shrank somewhat due to reduced net migration from Mexico.

Real Estate and Construction
Real estate markets cooled and construction activity fell in most areas of the District during October and early November. Demand was especially weak for commercial space, with rising vacancy rates, declining rents, and reduced construction activity evident in most areas, especially in the previously hot markets of Seattle and the San Francisco Bay Area. A construction industry contact from Seattle reported that his company's West Coast commercial building contracts were down 30 percent compared with a year earlier, and the company recently implemented its first major layoffs in ten years. Moreover, due to reduced travel demand, hotel and resort construction projects have been postponed or canceled in Hawaii and California. On the residential side, contacts provided widespread reports of price reductions for high-end properties; prices for less expensive homes generally remained firm, although average time on the market increased. Residential building activity fell in most areas, although the level remained high in some places, notably Southern California and Idaho. Industry contacts generally expect further reductions in construction activity next year, after existing project backlogs are worked down.

Financial Institutions
Loan demand fell on net during the survey period. Loan demand by businesses declined markedly in most areas, which more than offset a surge in demand for real estate refinance loans spurred by low interest rates. Brokerage houses and other investment firms have been struggling with low returns and responded with a substantial number of layoffs during the survey period.

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Last update: November 28, 2001