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Federal Reserve Districts

Twelfth District--San Francisco

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The Twelfth District economy expanded at a solid pace during the survey period of mid-October through mid-November. Elevated energy prices kept input costs high in some industries, but overall price inflation was held down by limited pass-through of these input prices to final prices. Contacts noted little labor market slack in most areas, although significant wage increases were reported only for scattered groups of workers with specialized skills. Sales of most retail items except automobiles were solid, and service providers reported strong demand. Manufacturers and agricultural producers saw further growth in output and sales. Activity in residential real estate markets cooled in some areas but remained at high levels overall, while demand for commercial real estate improved further. District banks reported solid loan demand and good credit quality.

Wages and Prices
Contacts reported that increases in inflationary pressures generally were limited to products and services for which energy costs are a significant component, such as transportation services, fertilizers, and construction materials. In the transportation sector, fuel surcharges have become common and prices rose in general. In other sectors, stiff competition restrained most firms' ability to pass high input costs on to final prices. However, a few contacts reported a slight increase in pricing power and plans to raise prices by early 2006.

Contacts noted only limited labor market slack, with especially tight conditions evident for workers with specialized skills in the financial, construction, and health-care services sectors, some of whom saw considerable salary increases. Outside of these worker groups, salary pressures generally remained modest, although a few contacts noted significant increases in overall labor costs. Employers' costs for employee benefits reportedly rose at nearly a double-digit pace, substantially outstripping salary growth.

Retail Trade and Services
District retail sales improved following a slight lull during the last survey period. Consumer spending on food, apparel, and other small retail items was solid, with substantial growth in same-store sales reported in some areas. By contrast, automobile sales remained at low levels on net. Contacts noted good sales of imported vehicles but lackluster sales of domestic brands, as consumers continued to shift away from sport utility vehicles and trucks to more fuel-efficient models.

Demand for services was strong overall. Service providers in the food and beverage, health-care, media, and transportation sectors reported substantial sales growth. Activity in the travel and tourism sector remained robust. Hawaii is on track to set a record for tourist visits this year, and contacts reported rising hotel occupancies and room rates there and in California.

District manufacturers reported solid demand during the survey period of mid-October through mid-November. Orders and sales of semiconductors rose, and capacity utilization inched up from already high levels. Demand for machine tools and industrial equipment has been strong, and it grew further during the survey period. In the aerospace sector, commercial aircraft production expanded to meet growth in orders, although overall activity in the sector was held down by a recent softening in demand for products related to national defense. District food processors saw strong orders and sales.

Agriculture and Resource-related Industries
Agricultural producers reported strong demand during the survey period and generally good supply conditions. Orders and sales were robust and prices were largely stable for a variety of agricultural products, including grains, vegetables, and livestock. Potato yields have been low, however, holding potato prices well above last year's level. Contacts reported that higher costs for fertilizers and other energy-intensive inputs have reduced profit margins, since agricultural producers generally are not able to pass these cost increases on to final prices.

Real Estate and Construction
Conditions remained robust overall in residential real estate markets despite slight moderation in some areas, and conditions in commercial real estate markets improved further. Home sales, price appreciation, and construction activity continued at rapid rates throughout the District, with especially strong demand noted for condominiums in Hawaii and in parts of the Pacific Northwest. However, cooling was evident in residential real estate activity in some markets--notably in Southern California, where existing houses remained on the market longer, inventories of new homes rose, and price appreciation slowed relative to previous survey periods. On the commercial side, office vacancy rates fell further and rents rose in most major markets. Builders indicated that strong demand for new residential and commercial structures, as well as continued hurricane-related supply disruptions, resulted in scattered shortages of materials that delayed some building projects. Rising materials costs associated with these developments also translated into price increases for new construction in some areas.

Financial Institutions
District banking contacts reported solid loan demand and good credit quality during the survey period. The volume of loans in most categories remained at high levels or grew further, although there were scattered reports of reduced demand for mortgage originations, construction loans, and business loans for capital spending purposes. Credit quality reportedly was good in all areas and improved further in some, notably in Hawaii.

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Last update: November 30, 2005