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Federal Reserve Districts

Twelfth District--San Francisco

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Economic activity in the Twelfth District appeared to pick up slightly during the reporting period of June through mid-July. Upward price pressures remained quite modest, and upward wage pressures were largely absent. Sales of retail items and services firmed a bit further. Reports from District manufacturers indicated continued expansion, although excess capacity remained high in some sectors. Sales were strong for agricultural producers, and demand for energy resources strengthened. Activity in housing markets was mixed but appeared to decline on net, while demand for commercial real estate was largely unchanged at very low levels. Contacts from financial institutions reported largely stable lending activity and credit quality.

Wages and Prices
Upward price pressures remained very modest on net during the reporting period. While energy prices edged up and prices also rose modestly for selected industrial commodities such as steel and copper, final prices for most retail items and services continued to be held down by weak demand and excess capacity. Contacts in a few industries pointed to recent increases in shipping costs that they anticipate will be passed on to final prices later this year or in 2011.

Contacts in most sectors characterized wages as largely flat, although some pointed to significant increases in the costs of employee benefits, especially for health insurance. Upward wage pressures were negligible in most sectors and regions, held down by continued high levels of unemployment and limited hiring. Reports throughout the District indicated that most businesses expect to remain cautious in hiring for the foreseeable future. Contacts noted that their reliance on temporary workers over permanent hires will continue above historical norms.

Retail Trade and Services
Sales of retail items were mixed but showed further modest improvement on net. While consumers remained focused on necessities and lower-priced options, reports indicated expanding consumer appetite for discretionary spending. Discount retail chains and traditional department stores both reported higher levels of sales, and a few contacts noted declines in promotional activity. By contrast, sales were characterized as largely flat for grocers, as well as furniture and household appliance retailers. Sales of new domestic and imported automobiles weakened slightly during the reporting period, although contacts noted that activity rebounded somewhat in recent weeks. Demand for gasoline strengthened but remained below historical averages for the season.

Demand for services remained somewhat weak but exhibited further signs of improvement on balance. Contacts in the restaurant and food services industry reported modest increases in demand. For professional and media services providers, sales were largely stable at low levels. Contacts noted that potential clients increased their requests for bids, but the added interest produced only limited numbers of new commitments. Demand for hospital services was relatively flat, especially for discretionary services. Energy utilities reported further increases in demand from selected industries, such as technology, metal, and wood products. Conditions in the District's travel and tourism sector continued to improve. Business travel and convention activity picked up further, and visitor volumes and hotel occupancy rates rose in several of the District's major markets, particularly Hawaii.

District manufacturing activity was mixed but appeared to strengthen a bit further on net during the reporting period of June through mid-July. Manufacturers of semiconductors and other information technology products reported further demand growth, with balanced inventories and continued strength in new orders. Production rates and deliveries picked up modestly for makers of commercial aircraft and parts. However, new orders remained limited and contacts expressed uncertainty about the strength of the airline industry recovery and prospects for future orders. While capacity utilization remained at low levels for companies in the metal fabrication sector, further demand improvements were noted, especially for items used to maintain or upgrade existing capital equipment. By contrast, apparel makers characterized conditions as "flat." Despite improved demand, high inventory levels for gasoline and distillates prompted refineries to slow production.

Agriculture and Resource-related Industries
Demand was strong for agricultural products and improved for natural resources used for energy production. Orders and final sales remained robust for assorted crop and livestock products. Growing and grazing conditions have been favorable in recent months, and contacts noted that input costs have been largely stable. Strong global demand supported an increase in oil extraction activity during the reporting period, and extraction activity for natural gas continued at a solid pace.

Real Estate and Construction
Demand for housing in the District appeared to deteriorate somewhat from the previous period, while demand for commercial real estate was largely unchanged at very low levels. The pace of home sales remained mixed across areas but appeared to decline on net, even as home prices edged up further in some parts of the District. Several contacts noted again that limited availability of nonconforming "jumbo" loans is holding down sales of higher-priced homes in some areas. Conditions in commercial real estate markets remained depressed, as vacancy rates for office and industrial space stayed at very elevated levels in many parts of the District. One California contact noted that although only a few large commercial properties have sold in recent months, the prices received were surprisingly high.

Financial Institutions
District banking contacts reported that loan demand was largely stable compared with the prior reporting period. Demand for commercial and industrial loans continued to be restrained by business uncertainty about the economic environment. For most contacts, their current assessment of growth prospects for their firm and industry are the same or weaker than was their assessment in early 2010, with corresponding restraint evident in their planned capital expenditures. Demand for consumer loans was characterized as largely unchanged at low levels. Lending standards remained relatively restrictive for business and consumer lending, although reports pointed to signs of stabilization in overall credit quality.

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Last update: July 28, 2010