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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 September through early October, with reports pointing to additional signs of stabilization or improvement in some sectors. Upward pressures on prices and wages were largely absent. Retail sales remained sluggish on net, while demand for most services continued to slide. District manufacturing activity firmed a bit further, although excess capacity remained unusually high in some sectors. Demand appeared to hold largely steady for agricultural producers but continued to weaken for providers of natural resource products. Demand for housing showed further slight improvement, but conditions continued to deteriorate in commercial real estate markets. Contacts from the banking industry and other industries reported stable or slightly increased loan demand and improved credit access.

Wages and Prices
Upward price pressures were weak to nonexistent during the reporting period. Commodity prices in general were stable, although contacts noted that energy prices have been mixed in recent months, with oil up and natural gas down. Retailers reported that sales prices were below their levels from 12 months earlier in many cases, and service providers such as hotel operators, trucking companies, and providers of professional services reported significant rate cuts in recent months. By contrast, prices have firmed for computer memory chips as a result of sustained demand increases this year.

Contacts generally characterized wages as flat, although some businesses faced significant increases in the costs of employee benefits. Upward wage pressures were limited by high unemployment in most areas, and contacts noted ample availability for hourly and salaried employees alike. Employment cuts and an ongoing focus on organizational and technological efficiencies have enabled many businesses to raise productivity and reduce their labor costs this year, although this has been offset by rising costs of employee health benefits and retirement plans in some cases.

Retail Trade and Services
Sales of retail items other than automobiles were little changed on net. Reports from retailers of various types indicated that unit sales and revenues were little changed from prior low levels; consumers' continued preference for lower-priced options held down sales of more expensive items in general and contributed to a decline in revenues at grocery stores. By contrast, contacts pointed to stronger demand and sales for furniture. Retail inventories generally were reported to be at or near preferred levels, as most retailers have adjusted to the lower level and changing composition of demand. Sales of new automobiles and light trucks fell back to the very low levels that prevailed prior to the August surge resulting from the Federal government's cash-for-clunkers program. Demand for used automobiles also weakened during the reporting period; however, because households and rental companies have been extending their ownership intervals for existing vehicles, inventories remained lean and prices rose.

Demand for services fell further. Activity was very slow for providers of business services such as consulting and trucking, and reduced passenger volumes for airlines were attributed in part to ongoing declines in business travel. Demand and revenues continued to ease for providers of health-care services, as consumers reportedly have been deferring elective procedures and coinsurance payments. Restaurant and food service providers continued to struggle with weak demand, although one contact pointed to a stabilization compared with the steep declines observed earlier in the year. Conditions remained somewhat mixed but very challenging on net in the tourism and leisure sector: the steep slide in hotel and resort visits continued in Southern California and Las Vegas, but contacts in Hawaii reported continued firming in visitor arrivals and hotel occupancy rates.

District manufacturing activity showed further signs of improvement but remained at low levels overall during the reporting period of September through early October. Conditions continued to improve for manufacturers of semiconductors and other information technology products, with capacity utilization rates reportedly returning to levels achieved prior to the recession in some cases. Food manufacturers also reported strong demand and significant sales gains. By contrast, metal fabricators and makers of wood products reported no improvement over prevailing conditions of extreme slack. Activity at petroleum refineries continued to decline as a result of producers' efforts to reduce excess inventories. Makers of commercial aircraft and parts reported that new orders were "almost nonexistent," although ongoing work on the prior backlog has prevented precipitous declines in deliveries and revenues.

Agriculture and Resource-related Industries
Demand for agricultural products was largely unchanged, but it fell further for extractors of natural resources used for energy production. Sales held largely steady for most types of agricultural products, and favorable production conditions, including ample availability of inputs, reportedly have led to excess supply for some crops and dairy products. Weak demand has caused a reduction in sales and extraction activity for oil and natural gas; inventories were very high on a seasonal basis, especially for natural gas, for which inventories reportedly are approaching storage capacity.

Real Estate and Construction
Reports suggested that demand for housing continued to improve slowly, while demand for commercial real estate eroded further. The pace of home sales picked up further in parts of the District, accompanied by rising prices in some cases. However, the momentum for recovery has been undermined by ongoing increases in foreclosure rates, which have slowed the decline in the inventory of available homes. As a result, new home construction continued at a very slow pace throughout the District, and industry contacts noted little or no prospect for a significant pickup in the near term. Conditions continued to deteriorate in the commercial real estate market: demand for office and industrial space fell further, and financing for new development and purchases reportedly remained "frozen."

Financial Institutions
District banking contacts reported that loan demand was largely stable or perhaps rose slightly compared with previous reporting periods. Reports from various areas suggested some pickup in total loan volumes, although contacts also noted that business loan demand has been held down by companies' reluctance to make new capital investments before they observe concrete evidence of a sustained economic recovery. Lending standards remained relatively restrictive, with scattered reports of further tightening, especially for commercial real estate lending, and credit quality continued to deteriorate. However, on net bankers and other contacts noted improved access to financial capital in recent months.

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Last update: October 21, 2009