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Federal Reserve Districts

Twelfth District--San Francisco

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Reports from contacts indicate that economic activity continued to expand at a solid pace in most parts of the District in late July and August. In recent weeks, contacts cited selected pockets of price inflation, notably for energy, construction supplies, and steel. Wage pressures remained modest but up slightly overall, boosted by tight supplies of higher-skilled workers. Retail sales remained strong, as did the demand for services. Manufacturing activity reportedly picked up for a variety of products. District providers of agricultural and resource products reported generally solid demand. Residential real estate activity remained robust, although there were some scattered hints of softening. Demand for commercial real estate was stable. District banks reported solid loan demand and good credit quality.

Prices and Wages

District contacts reported pockets of escalated prices, mainly in the areas of energy and construction supplies during the most recent survey period; cement, concrete, steel, and lumber prices increased sharply. However, prices at retail stores were reported to be flat. Wages and salary pressures remained modest but up slightly overall, with reported wages for low-skill jobs being stagnant and wages for some highly sought skilled occupations, such as nursing and IT professionals, having increased. Respondents in all sectors reported that rising health insurance costs contributed significantly to increases in overall compensation costs.

Retail Trade and Services

District contacts indicated that retail sales were strong in late July and August. Automobile dealers reported a slight improvement in overall sales in recent weeks, especially for foreign brands. Increased incentives have been placed on domestic models to help reduce inventories.

Business conditions for District service providers remained robust. Demand for advertising, media, and health-care services continued to rise. High volumes of international trade have kept several District seaports operating at capacity, which in turn has translated into increased demand for dockworkers and rail services. Conditions in the District travel and tourism sector generally were strong. Hotel occupancy rates continued to rise in Hawaii, California, and other District markets. Increases in both domestic and international visitors boosted the tourism sector in Hawaii.


Demand conditions in the District's manufacturing sector generally improved during the most recent survey period. Sales and new orders of semiconductors rose, and capacity utilization edged up further. Inventories of chips rose modestly and prices were flat. Lumber manufacturers faced strong domestic and foreign demand and reportedly operated close to full capacity; consequently, prices for wood panels, containerboard, pulp, and other wood products increased substantially. Contacts reported that the conditions in the commercial aircraft sector improved, as new orders from Asia offset a paucity of domestic and European orders. The availability of some inputs remained uncertain in recent weeks; several manufacturers noted that prices for steel and other metals rose sharply as a result of short supply.

Agriculture and Resource-Related Industries

District providers of agricultural and resource-related products reported continued solid demand. Boosted by foreign demand, sales of a variety of District agricultural products have been strong, especially tree nuts. The weather has been conducive to good harvests and yields. In the resource sector, contacts indicated that electric utilities are making investments to expand generation capacity to catch up from past underinvestment. Prices for natural gas remain high.

Real Estate and Construction

District residential real estate markets generally remained robust during the most recent survey period. However, reports from southern California indicated scattered hints of some softening; contacts reported that the amount of time needed to sell the supply of houses on the market rose slightly in some areas and that the pace of home price appreciation has begun to slow. On the commercial side, demand conditions were little changed, and prices and rental rates remained largely flat.

Construction activity generally was robust in most areas, particularly in Hawaii, where the Department of Defense has begun renovations of military housing. Respondents reported that shortages of some building materials, such as steel and cement, increased construction costs and caused construction delays in some cases.

Financial Institutions

District banking contacts reported generally solid loan demand and good credit quality in late July and August. Demand for business lending continued to improve in most areas in the District. Similar strength was evident in commercial real estate lending, where respondents observed increased interest by investors in commercial real estate loans. In contrast, demand for mortgages to finance home purchases weakened slightly. Finally, a majority of District banks surveyed added employees in recent weeks and plan to continue hiring.

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Last update: September 8, 2004