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Federal Reserve Districts

Twelfth District--San Francisco

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The Twelfth District economy expanded at a solid pace in March and early April. Although contacts noted a slight increase in inflation for final goods and services, due in part to higher energy prices, the pace of inflation reportedly remained modest. Compensation pressures were up slightly, with rising health-care costs and some pickup in demand for skilled workers. District retailers and service providers noted solid demand in recent weeks, and manufacturing activity continued to expand throughout the District. Demand for District agricultural and resource-related products reportedly was strong. Activity in residential real estate markets remained vibrant, and commercial real estate markets improved further. District banks reported strong loan demand and high overall credit quality.

Prices, Wages, and Labor Markets
Contacts reported that price inflation remained modest, although it was up slightly compared to the previous survey period. The overall pickup in inflation was attributed, in part, to high and rising oil prices, which pushed up costs for a wide range of products including transportation services and energy-intensive goods, such as fertilizers, plastics, and many construction materials. Many producers have passed these cost increases on to final goods prices. For example, a contact in the roofing business stated that rapidly rising prices for oil-based roofing materials have led him to raise his prices for roofing services. Those District businesses that have not increased final prices cited vigorous competition among sellers and continued gains in production efficiency as the restraining factors.

Respondents reported some tightening in District labor markets in recent weeks, especially for high-skilled workers, though most indicated they were able to fill job openings. The increased demand for skilled workers, along with continued increases in health benefit costs for all workers, led to a slight pickup in labor compensation.

Retail Trade and Services
District retailers indicated generally solid sales in recent weeks. Auto sales continued to be strong overall, although demand reportedly softened somewhat for domestic makes. Contacts reported a notable shift in demand toward more fuel-efficient brands. Demand for SUVs and trucks softened in recent weeks, negatively affecting many domestic manufacturers.

District service providers continued to report strong growth in March and early April. Demand was especially robust for health-care, transportation, and food services. Activity in the District's travel and tourism sector remained vigorous, pushing up hotel occupancy and average daily room rates in most areas. For instance, continued strong year-over-year growth in the number of domestic and international visitors to Hawaii fueled robust conditions in the tourism sector there.

Demand for manufactured goods picked up further throughout the District during the survey period. Makers of machine tools reported strong growth in new orders and solid workloads. For high-tech producers, semiconductor orders and sales reportedly were solid and capacity utilization was stable at relatively high levels. Robust construction activity fueled rising demand for wallboard, insulation, and other building materials. As in the previous survey period, the main exception to solid conditions in the manufacturing sector was in telecommunications, as communications equipment makers continued to struggle with weak orders and substantial excess capacity. Contacts throughout the manufacturing sector stated that increasing costs of materials and energy inputs have prompted them to keep production as close as possible to demand.

Agriculture and Resource-related Industries
District agricultural contacts reported strong growth in orders and sales of agricultural goods. Contacts noted rising input costs, particularly for fuel. In general, businesses passed these increases on to final goods prices. In the energy sector, producers of oil and natural gas reported strong demand and rising drilling costs.

Real Estate and Construction
District residential real estate markets remained robust in March and early April, and conditions improved slightly in commercial real estate markets. The pace of home sales, price appreciation, and home construction remained rapid in most areas in the District. Demand for District commercial real estate strengthened moderately in recent weeks, with office vacancy rates improving in many markets. Builders indicated that strong consumer demand for both residential and commercial real estate allowed them to pass on the cost increases of building materials such as concrete, wallboard, lumber, and steel products. Continued solid demand for new homes plus increased demand for commercial real estate kept overall construction activity at high levels; contacts noted construction backlogs in several areas.

Financial Institutions
District banking contacts indicated a general continuation of trends from the previous survey period. Commercial and industrial lending continued to improve. Demand for construction, commercial real estate, and residential loans remained at high levels overall, although home mortgage demand continued to slow somewhat. District banks and financial institutions reported that loan quality remained high.

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Last update: April 20, 2005