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Federal Reserve Districts

Twelfth District--San Francisco

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Economic activity in the Twelfth District grew modestly during the survey period of December through the beginning of January. Upward price pressures were limited in general but significant for food and energy, and increases in labor compensation remained moderate on net. Contacts reported relatively weak consumer spending during the holiday season, and demand fell further for some services. Manufacturing activity was mixed across sectors but largely held steady on net. Agricultural producers saw continued solid growth in sales. Activity in residential real estate markets remained exceptionally weak, while demand for commercial real estate was high but eased further in some areas. Banking contacts reported tighter credit standards and little change in overall lending activity.

Wages and Prices
District contacts reported that price inflation was modest overall, although upward pressure remained strong for food and energy-intensive items. Final prices were largely stable to down for a variety of retail products, notably apparel and electronics. By contrast, increases in the costs of energy and assorted raw materials, such as titanium and stainless steel, created upward price pressures for providers of transportation services and selected manufactured goods. Prices rose further for various food products, especially dairy, corn, and wheat.

Wage increases were moderate on net, with contacts noting only small changes in overall labor costs. Upward wage pressures eased in some areas due to slight loosening in labor markets. However, upward pressures remained strong for engineers and various other types of skilled workers, and in some states, especially California, higher minimum wages effective at the start of 2008 are expected to raise the costs of low-skilled labor in the near term.

Retail Trade and Services
Reports on retail sales remained downbeat due to weak holiday spending. Although contacts in some areas noted modest growth relative to last year, holiday season sales generally were reported to be flat to down; contacts also pointed to early and aggressive price discounting, especially for apparel. Weakness was evident in all market segments during the survey period, including department stores, major retail chains, and smaller retail establishments. The main exception to weak holiday sales was consumer electronics products, for which sales grew briskly. Demand fell further for household items such as furniture and appliances. Sales of new automobiles remained sluggish, especially for domestic makes, and demand for used vehicles continued to fall from the high levels reached earlier in 2007.

Demand growth eased for service providers on net. Growth remained brisk for providers of health-care services. However, sales weakened further for advertising agencies and providers of media services due to weak demand from the automotive and home-furnishings sectors, and providers of professional services such as accounting and consulting plan to reduce staff due to falling demand. Providers of real estate services such as title insurance continued to slash jobs. Travel and tourism activity was at high levels in Hawaii and Southern California, but indicators such as visitor counts and hotel occupancies remained slightly below their year-earlier values.

Demand for products manufactured in the District generally held steady during the survey period of December through the beginning of January. Production activity and new orders remained robust for makers of commercial aircraft and their suppliers. Sales of information technology products continued on a moderate growth path, with high levels of capacity utilization and generally balanced inventories reported. However, a maker of industrial equipment reported “tepid” activity on net, and demand for wood products continued to fall, resulting in scattered shutdowns and closures for lumber mills in the Pacific Northwest. Food manufacturers saw continued brisk sales gains, while apparel makers reported weak order growth and concerns about cancellations.

Agriculture and Resource-related Industries
Demand for agricultural products continued to expand. Contacts reported solid growth in domestic and overseas sales for a variety of crops. However, higher prices for fertilizer and grain inputs have raised costs for many farmers and ranchers. Availability of agricultural labor was mixed: contacts in Arizona reported emerging constraints due to newly effective legislation that imposes sanctions for hiring undocumented workers, while higher availability was noted among farmers in the Pacific Northwest due to employment reductions in the lumber industry.

Real Estate and Construction
District housing markets remained in the doldrums during the survey period, while demand for commercial real estate was high but showed signs of easing in some areas. Demand for new and existing homes remained exceptionally weak, and the inventory of available homes was at high levels in most areas and rose further in some. Price performance was mixed: prices on homes sold reportedly fell further in much of California, Arizona, and Nevada, but they held firm or rose a bit in parts of Utah and the Pacific Northwest. Mortgage availability and terms remained tight and continued to be a significant constraint on home purchases in many areas. In contrast to the residential sector, construction activity and sales in the commercial and industrial sectors generally have remained strong. However, contacts reported scattered signs of weaker demand, such as a decline in the number of interested buyers in the San Francisco Bay Area and lower occupancy rates for leased space in newly constructed buildings in Idaho.

Financial Institutions
District banking contacts reported that loan demand changed little relative to the previous survey period. Commercial and industrial loan volumes were largely stable, and lending for residential mortgages stayed stuck at low levels throughout the District. Lending standards remained relatively restrictive for residential mortgages and construction loans, and scattered reports pointed to further tightening for consumer and business borrowers in general.

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Last update: January 16, 2008