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Federal Reserve Districts

Twelfth District - San Francisco

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Reports from Beige Book contacts indicate a strong pace of growth in most Twelfth District states in the recent survey period. District retailers reported moderate gains in recent months. Whereas service providers, particularly those in the shipping and freight sector, noted an acceleration in growth above an already rapid trend. Manufacturing activity remained strong in most of the District, as expansions in food-processing and wood product production added to booming growth in aircraft and high-technology equipment manufacturing. Steady demand for residential and non-residential real estate kept construction activity at high level in much of the District. The competition among financial institutions for "good" loans reportedly remained aggressive throughout the District. Respondents' generally positive views of the economy were tempered by many reports of shipping bottlenecks and shortages of both skilled labor and entry-level workers.

Business Sentiment
District respondents expect continued strong performance in the U.S. economy, with regional growth outpacing the national rate. Slightly more than one-half of the respondents expect U.S. GDP growth to remain at or near its long-run average pace, leaving the national rate of unemployment at its current level. An increasing number of respondents expect inflation to edge up in coming quarters. Nearly all respondents expect economic growth in their regions to outpace growth in the national economy over the next year. Respondents are most optimistic about the strength of business investment, housing starts, and foreign trade in their areas.

Retail Trade and Services
Retailers reported moderate growth in retail sales throughout the District. The strongest reports were from Nevada and states in the Pacific Northwest, where healthy apparel sales were noted. Contacts in California, Utah and Arizona reported slower retail sales growth than in previous weeks, driven largely by flat food and apparel sales. Despite the slowdown in retail sales, few respondents reported excess inventories or unplanned price cuts. Several respondents reported difficulty finding qualified entry-level workers.

Respondents in the service industry continued to report solid growth. Demand for shipping and freight services in the Pacific Northwest and Intermountain States remained very high. However, capacity constraints in this sector, particularly in rail transportation, could restrain further growth. Travel and tourism remained strong in Utah and California, although fears of "El Nino" reportedly have caused cancellations for the winter tourist season. Several respondents indicated that labor markets for service sector workers remain exceedingly tight at all skill levels. Higher offer wages, signing bonuses, and referral awards were reported for positions ranging from technical sales staff to entry-level bank tellers.

Manufacturing contacts reported solid gains throughout the Twelfth District, as expansions in food-processing and wood product production augmented ongoing growth in aircraft and high-technology equipment manufacturing. Strong growth in manufacturing reportedly increased capacity utilization rates in recent weeks, especially for manufacturers of paper products, high-tech components, industrial machinery, and aircraft. However, in most sectors, higher utilization rates have not constrained production, with Boeing and its suppliers being the most notable exceptions. In contrast, respondents reported that shipping bottlenecks and labor shortages, particularly for skilled workers, are beginning to limit activity in some areas. Demand for transportation and freight services, particularly in the Pacific Northwest, reportedly has outstripped available supply, causing production slowdowns and final product delivery delays in many sectors. Labor shortages reportedly have intensified in recent weeks, and many contacts noted that even when significantly higher wage offers accompany signing bonuses and other benefits, some advertised positions either go unfilled or are filled by workers who lack the desired training.

Agriculture and Resource-related Industries
Reports on agricultural conditions in the District generally were favorable. Good weather conditions have produced better than average harvests in many regions. Increased production of exportable processed food items has boosted demand for many agricultural products. In contrast, concerns over food safety continued to soften the beef market in recent weeks. Harvesting throughout the District reportedly was slowed by shortages of seasonally employed agricultural workers and fierce competition for product transportation from field to market.

Real Estate and Construction
District residential real estate markets remained strong in recent months, despite some slowdown in several states. In the Puget Sound area and parts of Northern and Southern California, heavy demand for single family homes has begun to outpace the available supply of building materials and labor, increasing construction costs and home prices. In parts of southern Arizona, strong demand for retirement residences is keeping construction activity at a high level. In contrast, residential real estate sales in Idaho, Utah, Nevada and Oregon have slowed recently, cooling residential construction activity in these areas.

Commercial real estate and construction activity remains strong in most parts of the District. Respondents reported that commercial office and industrial space has become harder to find, despite an acceleration in commercial and industrial construction. In Portland, the first signs of speculative building appeared, as construction began on two downtown office buildings. In California, respondents report declines in commercial vacancy rates throughout the state. Respondents in the hottest markets indicate that the demand for contractors, subcontractors, and materials finally has outpaced supply and is beginning to result in long waits and unbid contracts.

Financial Institutions
District banking conditions remained solid during the recent survey period. Respondents pointed to high liquidity of financial institutions as fueling strong competition among banks to attract quality loan customers. One respondent noted that banks were making an effort to maintain credit standards in the face of decreased demand by quality borrowers.

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Last update: October 29, 1997