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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 modestly during the reporting period of late October through late November. Upward pressures on prices and wages were largely absent. Consumer demand remained weak but showed signs of improvement in some retail categories, and demand for services appeared to be little changed on net. Manufacturing activity was mixed but appeared to firm a bit further overall. Agricultural producers reported largely stable sales, while demand remained somewhat weak for providers of energy resources. Demand for housing exhibited further modest improvement, but conditions continued to erode in commercial real estate markets. Banking contacts reported largely stable loan demand and lending standards but further declines in credit quality.

Wages and Prices
Upward price pressures were largely absent during the reporting period. Outside of increases in oil and natural gas, commodity prices in general were stable. Final prices for various retail goods were held down by substantial discounting and promotional activity, and sustained weak demand further reduced the prices for some services, such as professional services and hotel rooms. In contrast, prices for computer memory chips continued to firm, a trend that is expected to persist through the holiday season.

Contacts reported little or no upward wage pressures. High levels of unemployment held down wage pressures throughout the District, and contacts expect this to continue for an extended period as labor demand and hiring remain subdued. Employers in various sectors also have been implementing cost-saving measures such as suspending their 401(k) match and increasing employee contributions for health benefits. Nonetheless, many businesses expect significant increases in the costs of health insurance benefits in the coming year, based on contracted or anticipated rate increases.

Retail Trade and Services
Retail sales remained weak on net, although reports suggested that they were stable or slightly improved compared with the previous reporting period. While consumers continued to focus on necessities and trade down to lower-priced options, contacts noted firmer demand for some nonessential items, and traditional department stores and discount chains alike reported improvements in sales. Similarly, sellers of furniture and household appliances reported further improvements in demand. New automobile sales remained at very low levels, and sales for used automobiles remained weak, although a limited supply of used vehicles has kept their prices firm. In general, retailers' expectations for holiday sales are somewhat downbeat, with sales expected to be largely unchanged or down from last year's season; as a consequence, inventories of holiday items have been running very lean to date.

Demand for services remained very weak on net. Demand fell further for providers of professional services such as accounting and legal services. Contacts in the restaurant and food services industry noted that demand held largely stable, albeit at a very low level. Similarly, providers of real estate services such as title insurance reported that activity was largely flat at low levels. Conditions remained challenging but showed further signs of improvement in the tourism and leisure sector: contacts in Southern California indicated that the sharp rate of decline in hotel and resort visits is slowing, and contacts in Hawaii continued to report firming in visitor arrivals and hotel occupancy rates.

District manufacturing activity showed further signs of improvement during the reporting period of late October through late November. Reports from manufacturers of semiconductors and other technology products indicated that demand continued to strengthen, with rising sales and capacity utilization rates noted. Food manufacturers reported that new orders and sales remained strong on a seasonal basis. By contrast, metal fabricators and makers of wood products continued to experience very weak demand, keeping their capacity utilization rates at unusually depressed levels. Refining capacity at petroleum refineries remained well below their five-year average as producers sought to reduce excess inventories. New orders continued to be very weak for makers of commercial aircraft and parts, although ongoing work on the prior backlog has kept deliveries stable.

Agriculture and Resource-related Industries
Demand held largely steady for agricultural products and remained somewhat weak, but with signs of improvement, for providers of natural resources. Sales continued at a solid pace for most types of agricultural output, including livestock products and assorted crops, and input costs were reported to be largely unchanged. Oil extraction activity has been at low levels but rose somewhat in response to earlier increases in the price of oil. Similarly, as a result of price increases and a resolution of problems with pipeline deliveries in prior months, natural gas extraction activity expanded somewhat, with restarts reported for some previously dormant wells.

Real Estate and Construction
Activity in the District's housing markets continued to improve gradually, while demand for commercial real estate weakened further. The pace of home sales in many areas of the District continued to pick up, and prices in some areas have risen for several consecutive months. However, ongoing increases in the supply of foreclosed properties in some areas have slowed the decline in the inventory of available homes and contributed to builders' decisions to hold construction activity for new homes at very low levels. Conditions in commercial real estate markets deteriorated further, with vacancy rates for office and industrial space increasing in many parts of the District. However, one contact reported slight improvement in the availability of financing for new development and investment transactions, which has been very tight for a prolonged period.

Financial Institutions
District banking contacts reported that loan demand was largely unchanged compared with the prior reporting period. Commercial and industrial loan volumes continued to be held down by businesses' uncertainty about demand and corresponding caution in their capital spending and inventory investments. Demand for consumer loans was stable at low levels. Contacts noted further declines in credit quality, and lending standards remained relatively restrictive for both consumer and business lending, with further tightening reported for commercial real estate loans. By contrast, the availability of venture capital improved a bit, with contacts noting slight upticks in investment amounts and IPO activity.

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Last update: December 2, 2009