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Federal Reserve Districts

Twelfth District - San Francisco

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Reports from Twelfth District contacts indicated that economic activity continued to contract slightly in late November and December. Respondents reported steady or declining prices for most goods and services and little wage pressure. Holiday retail sales generally were lackluster, with some retailers faring better than others. Demand for travel and tourism stabilized in recent weeks, largely due to increased leisure travel. Manufacturing activity remained weak, although producers of some high-tech products noted a pickup in demand. District agricultural conditions showed little change during the recent survey period, as low prices and ample supplies continued to depress profits. Demand for residential real estate cooled slightly but remained at high levels. In contrast, conditions in commercial real estate markets deteriorated further, damping construction activity in many areas of the District. Falling loan demand, softening asset quality, and declining interest rate spreads characterized conditions among District financial institutions in recent weeks, but overall the industry remains healthy.

Prices and Wages
District respondents reported steady or declining prices for most consumer and business products and services in the closing weeks of 2001. Intense holiday discounting among retailers drove down prices for a wide range of manufactured goods, including apparel, electronics, jewelry, high-end appliances, and home furnishings. Price declines also were noted for energy, air travel, hotel and tour packages, and luxury nondurable goods such as wine and spirits, imported food products, and catered items. Business contacts reported falling prices for accounting and legal services, advertising and printing, and energy.

Rising unemployment continued to ease wage and salary pressures throughout the District. Contacts noted that starting salaries for low- and medium-skilled workers have returned to early 2000 levels, and that starting salaries for information technology jobs have fallen by 15 to 20 percent over the past year. Contacts in information technology, banking, and legal services reported the elimination of hiring bonuses, decreased moving allowances, and more limited merit increases. A number of contacts indicated that employees are being asked to pay a larger share of health care costs than in past years and to accept more limited health plan options.

Retail Trade and Services
Respondents throughout the District characterized holiday retail sales in late November and December as weak, but better than expected given the state of the economy. Sales were strongest at "big box" retailers, with several reporting modest increases in nominal sales over last year. Department store sales generally were flat to down relative to last year, as heavy pre-Christmas discounting offset any increases in sales volumes. Sales were weakest for apparel and high-end merchandise including jewelry and home furnishings. Electronics, such as computers, personal data assistants, DVD players, and video game machines reportedly posted the strongest sales, as consumers took advantage of low prices and delayed payment options. However, relative to last year, nominal sales gains for these items were modest. Prepared foods and wines reportedly sold well, with volumes and nominal sales surpassing year-ago levels. Numerous contacts noted that internet shopping increased in their region relative to last year, despite increased concern among consumers about mail service.

Travel and tourism providers reported modest improvement in airline, rental car, and hotel bookings in late November and December relative to September and October. Hotel industry contacts noted that occupancy rates stabilized in recent weeks, but remain well below year-ago levels. Although tourism around markets largely accessed by car such as Arizona, Southern California, and ski areas in Northern California and Utah continued to outperform markets dependent on air travel such as Hawaii, Las Vegas, and San Francisco, the gap closed somewhat compared to the previous survey period. The improvement in travel and tourism bookings was almost entirely in the leisure travel market where consumers have responded to lower prices. In contrast, contacts throughout the District reported ongoing restrictions on nonessential business travel, due largely to the weak economy. Despite the pickup in leisure travel, heavy discounting continued to depress profits in the industry.

Although the District's manufacturing sector continued to contract in late November and December, contacts noted signs of stabilization, especially in the high-tech sector. High-tech producers reported fewer order cancellations and a slight pickup in bookings compared to the last survey period. In addition, inventories and capacity utilization remained steady or increased slightly. High-tech producers also noted that the pace of layoffs and job elimination eased in recent weeks.

Agriculture and Resource-Related Industries
Respondents reported little change in District agricultural conditions in recent weeks, with low prices and ample supply continuing to depress profits in the industry. Food safety has become a major concern of agricultural producers, with many investigating ways to protect against potential threats and working on ways to assure consumers of the quality of the products. On the bright side, contacts noted a pickup in export demand for a wide variety of agricultural products.

With the prices of most energy commodities falling, natural gas and oil producers have begun to reduce drilling activity. In addition, interest in siting and building electrical power plants has slowed, with some developers backing off their "fast track" approach and taking a more wait-and-see attitude.

Real Estate and Construction
District residential real estate markets remained solid through December, although signs of slowing were noted in most regions. Contacts reported relatively stable home prices but declines in rental rates, particularly for high-end properties. Demand for commercial properties continued to cool, particularly in Arizona, Northern California, and the Pacific Northwest. The slowing in commercial real estate markets tempered construction activity in most District states.

Financial Institutions
District financial institutions reported a slight weakening of conditions over the previous survey period. Respondents reported continued declines in net loan demand, especially among businesses, and some slowing in the demand for mortgage refinancing. Contacts also indicated that, while credit quality is generally good, signs of deteriorating asset quality have emerged. The most common theme among respondents was the negative effect that low interest rates have begun to have on interest rate margins and earnings. Respondents reported that bank capital and liquidity were ample, and that competition for quality borrowers remained intense.

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Last update: January 16, 2002