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Federal Reserve Districts

Twelfth District--San Francisco

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The Twelfth District economy expanded at a moderate pace during the survey period of March through mid-April. Overall price inflation was modest and wage pressures eased in some industries, although wage increases remained significant for workers with specialized skills in selected sectors. Retailers reported moderate sales gains on net, with robust gains reported for service providers. Manufacturers reported mixed conditions, while sales grew further for agricultural producers. Housing markets cooled further in most areas, but activity in commercial real estate markets continued to pick up. District banks saw solid growth in loan demand with the exception of residential mortgages.

Wages and Prices

Reports from District contacts indicated that overall price inflation was modest during the most recent survey period. Price declines for selected construction materials such as lumber and steel and for products in very competitive markets, notably apparel and electronic goods, held down overall inflationary pressures. By contrast, prices of selected inputs used in food processing, particularly corn and wheat, continued on their upward march, although contacts noted producers' limited ability to pass rising input prices on to final prices in this industry.

Growth in labor compensation remained moderate overall. Previously tight labor market conditions in the construction and agricultural sectors eased, partly alleviating the upward wage pressures in those sectors. However, shortages continued for workers with specialized skills in various sectors and in areas with especially tight labor markets, notably Hawaii, Idaho, and Utah, keeping compensation growth rapid for these worker groups.

Retail Trade and Services

District retail sales grew at a moderate pace on net in most areas. Sales grew compared with a year earlier at department stores and other major retail chains, and robust sales were reported among purveyors of luxury retail items. By contrast, demand fell further for products used for home improvement and construction. Sales of new autos and light trucks showed little change from the previous survey period, and imported vehicles continued to fare better than domestic models. Demand for used vehicles reportedly was solid and prices firmed.

Most service providers saw robust demand, with especially strong sales for providers of food and beverage and health-care services. Travel and tourism activity was brisk in key District locales, with high hotel occupancy rates reported in the broad Southern California region. However, hotel occupancy rates in Hawaii during the spring break period were down relative to the very high levels of the past few years, continuing the trend towards lower occupancy rates established earlier this year.


District manufacturers reported mixed conditions during the survey period of March through mid-April. Producers of commercial aircraft and their suppliers continued to operate near full capacity to meet growing order backlogs, and sales grew a bit further for products related to national defense. Apparel and food manufacturers reported strong sales. Demand was "spotty" for makers of industrial equipment, as rising demand related to public works projects was largely offset by weakness emanating from the residential construction and logging sectors. Semiconductor sales were up compared with a year earlier but weakened slightly relative to the previous survey period, and capacity utilization in the sector edged down. Manufacturers and respondents in other industries generally indicated plans for modest growth in capital spending this year relative to 2006, with a focus on information technology and related equipment aimed at productivity enhancement.

Agriculture and Resource-related Industries

Demand for agricultural products grew further. Contacts reported increased sales for a variety of crops and dairy products. However, California lettuce growers reported lackluster demand due in part to lingering food safety concerns arising from that crop's bacterial contamination last fall. Prices on agricultural inputs generally were stable, with the notable exception of significant price increases for corn and wheat used for livestock feed.

Real Estate and Construction

Conditions in residential real estate markets generally remained weak, but activity in nonresidential markets picked up further. In most areas, sales volumes for new and existing homes continued to fall and average time on the market continued to rise. Price appreciation slowed accordingly, with modest price declines evident during the survey period in some parts of the District. However, despite weak demand for new homes, contacts noted that many developers are not putting undeveloped land up for sale, suggesting that they expect the market weakness to be limited to the short term. Moreover, contacts in some areas noted recent signs of stabilization in the pace of home sales and price appreciation, along with a construction pickup for multifamily buildings. On the nonresidential side, vacancy rates for commercial space continued their gradual decline and rental rates rose further in most District cities. Construction activity for commercial and public projects expanded in some areas, largely offsetting declines in residential construction activity and thereby preventing significant declines in construction employment in those areas.

Financial Institutions

District banking contacts reported that loan demand was solid overall. Growing demand for commercial and industrial loans continued to offset ongoing declines in residential mortgage lending. Despite signs of deteriorating credit quality for real estate loans, primarily for subprime mortgages, credit quality in general remained at favorable levels. One banking contact reported that residential mortgage lenders have been discounting assessed home values when making new mortgage loans. Contacts noted ample availability of venture capital and funds for private equity financing.

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Last update: April 25, 2007