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Federal Reserve Districts

Twelfth District--San Francisco

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The Twelfth District economy firmed further during the reporting period of late November through the end of December. Price pressures for final goods and services remained limited despite increases for selected raw materials, and upward wage pressures were largely absent. Holiday retail sales were up notably compared with a year earlier, and demand continued to expand for consumer and business services. District manufacturing activity grew further on net, with sustained improvement noted for metal fabricators. Production activity remained solid for agricultural producers, and demand grew on balance for providers of energy resources. Home sales and construction stayed sluggish, and conditions continued to be weak overall in commercial real estate markets. Reports from District banking contacts indicated that loan demand was little changed from existing low levels.

Wages and Prices
Upward price pressures remained subdued on balance. Price increases were noted for assorted raw materials, such as cotton, copper, aluminum, and especially oil. However, final prices for most retail items and services continued to be held down by tepid demand and vigorous competition.

Contacts in most sectors characterized wages as essentially flat, although some continued to point to substantial increases in the costs of health insurance and other employee benefits. The most significant wage pressures were reported for workers with advanced skills in high-tech fields, for whom demand has been growing at a brisk clip in some parts of the District. Contacts in most sectors expect hiring activity to pick up over the next six months, but to a very modest degree, suggesting that wage pressures overall will remain quite limited during the first half of 2011.

Retail Trade and Services
Retail sales increased notably compared with the prior holiday season. Both traditional department stores and smaller specialty retailers reported that holiday sales exceeded their expectations, which were for modest growth. Moreover, tightly controlled inventories enabled many retailers to rely less heavily on price discounts and promotional activity than in the recent past. The pace of sales improved modestly for grocers compared with the prior reporting period, while it remained largely unchanged at a slow pace for retailers of furniture and major appliances. Demand for new automobiles continued to strengthen, particularly for light trucks. Demand for used vehicles was strong as well, and the resulting high trade-in values reportedly helped spur sales of new vehicles.

Demand increased further for business and consumer services on balance. Sales continued to expand for providers of technology services, including biomedical products, but they remained largely flat for providers of professional and media services. Restaurants and other food-service providers noted further modest improvements in demand, and suppliers of energy services reported increased deliveries to end-use customers. By contrast, providers of health-care services reported that demand weakened slightly in recent months. Conditions continued to improve for businesses in the travel and tourism industry. Contacts from several major markets in the District noted increases in visitor volumes and hotel occupancies, which resulted from rising business travel as well as tourism.

Manufacturing activity in the District continued to expand during the reporting period of late November through the end of December. Demand grew further for manufacturers of semiconductors and other technology products, with contacts noting balanced inventories and high levels of capacity utilization. Production rates remained at or near capacity for makers of commercial aircraft and parts, as an existing order backlog for larger aircraft was reinforced by rising orders for smaller commercial jets. Metal fabricators saw further increases in demand; sustained improvement has brought capacity utilization back near normal and prompted some firms to rehire employees laid-off over the past two years. Petroleum refiners continued to reduce their output and work down inventories, which have been at elevated levels in recent months. Conditions remained depressed for manufacturers of wood products.

Agriculture and Resource-related Industries
Demand was solid for agricultural products, and activity was stable to up slightly for extractors of natural resources used for energy production. Orders and sales remained robust for a variety of crop and livestock products, especially cotton and cattle. Outside of price increases for livestock feed, reports indicated that input costs were generally stable. Demand for crude oil grew further, spurred by robust demand from emerging economies combined with modest growth in domestic demand. For natural gas, ample inventories kept extraction activity largely flat.

Real Estate and Construction
Demand in District residential and commercial real estate markets was largely unchanged at very low levels. The pace of home sales remained quite slow throughout the District. In addition, an abundance of foreclosed properties and short sales kept inventories of available homes elevated in most areas, which put downward pressure on prices and the pace of new home construction. Demand for rental space grew in some areas, however, with a Seattle contact noting a modest increase in construction of apartment buildings there. Conditions continued to be weak on balance in commercial real estate markets, as vacancy rates stayed high in many parts of the District; rent reductions and other concessions by landlords remained common. In a positive sign, however, investor demand for well-leased office buildings continued to boost market values in some of the District's major commercial markets, such as San Francisco.

Financial Institutions
Reports from District banking contacts indicated that loan demand was largely stable compared with the prior reporting period. Businesses continued to be cautious regarding capital spending, which held the volume of new commercial and industrial loans at low levels. However, contacts noted a slight uptick in utilization of existing lines of credit for businesses. Consumer loan demand remained weak overall, and contacts reported a significant decline in mortgage refinancing, which they largely attributed to the recent rise in long-term interest rates. Lending standards remained relatively restrictive for most types of consumer and business loans, although reports suggested modest ongoing improvements in overall credit quality. Venture capital financing was a bright spot, with contacts noting increased investor interest and funding for early-stage technology companies during the reporting period.

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Last update: January 12, 2011