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Federal Reserve Districts

Twelfth District - San Francisco

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Reports from Twelfth District Beige Book contacts indicate solid growth along with a high level of economic activity in recent weeks. Retailers reported moderate gains in recent months, and service providers in the District noted an acceleration in growth from an already rapid trend. Manufacturing activity remained strong in much of the District, with many high-technology equipment manufacturers and Boeing operating at or near capacity. Steady demand for commercial real estate kept construction activity strong in most of the District, despite a slowdown in many housing markets. Respondents from financial institutions reported ample supplies of bank capital and liquidity, creating excellent terms for quality borrowers. Despite the healthy level of economic activity in recent weeks, respondents noted that labor shortages, shipping bottlenecks, and the strong dollar were beginning to dampen the District's rapid pace of growth.

Business Sentiment
Twelfth District respondents expect continued strong performance in the U.S. economy, with District growth outpacing the national rate. Slightly more than one-half of the respondents expect U.S. GDP growth to be at or near its long-run average pace, leaving the national unemployment rate at its present level. An increasing number of respondents anticipate a slight increase in prices in coming quarters, although a majority expect inflation to remain constant over the next 12 months. With regard to regional conditions, nearly all respondents expect growth in their area to outpace national growth in the coming year, with District business investment and consumer spending expected to post relatively fast growth.

Retail Trade and Services
Retailers in most District states reported moderate growth in retail sales. In California and the Pacific Northwest, contacts reported solid sales in recent months, boosted by strong demand for apparel and home furnishings. In contrast, retail contacts in Utah noted slower department store sales and reduced demand for "big-ticket" items, such as cars and trucks. Nearly all District retailers reported difficulty finding entry-level workers and many reported offering increased wages and larger employee discounts to attract temporary holiday help.

Service industry respondents continued to report strong growth. Respondents from Northern California and the Pacific Northwest reported healthy demand for telecommunication and business services. Demand for shipping and freight services continued to increase in many District states. In Southern California port traffic growth reportedly accelerated over an already rapid trend. Throughout the District, service industry respondents reported a dearth of employees at the desired skill levels. Contacts also noted that high turnover rates and short employee tenure were becoming primary concerns. However, many respondents remained reluctant to raise overall wage levels and instead have begun to take other actions, such as converting part-time to full-time jobs and giving periodic merit awards.

Reports on District manufacturing activity were generally positive, although the strong dollar, shipping bottlenecks, and labor shortages have tempered growth in some areas and industries. High-technology equipment manufacturers reported healthy growth and firms involved in commercial airplane manufacturing reportedly are running at full capacity. In the Pacific Northwest, the wood product industry continued to benefit from improved orders for pulp and paper products. Growth in the unprocessed lumber and food processing industries weakened in recent weeks, but remained at healthy levels. Respondents cited the strength of the dollar relative to East Asian currencies as the primary reason for this slowdown. Shipping bottlenecks and labor shortages, particularly for skilled workers, continued to constrain activity in many industries and areas. Manufacturing contacts in the Pacific Northwest, where shipping bottlenecks have been particularly troublesome, reported shifting to higher cost providers of freight services in order to meet scheduled production goals. To fill employment vacancies, respondents in the manufacturing sector reportedly have resorted to hiring unskilled labor to fill skill positions.

Agriculture and Resource-related Industries
Agricultural conditions generally were favorable throughout the District. Contacts reported healthy conditions for most crops and livestock. However, recent railroad capacity constraints reportedly resulted in handling and storage difficulties for producers of perishable crops, particularly grain. In addition, the depreciation of East Asian currencies reportedly softened demand for many raw agricultural products, as the relative price of U.S. crops increased significantly.

Real Estate and Construction
Commercial real estate activity continued to increase in most areas of the District, keeping District construction activity at high levels despite a slowdown in many housing markets. Respondents in many areas of the District noted slowing sales of both new and existing homes. Contacts in the Pacific Northwest and Utah noted that high material, land, and labor costs have made it difficult for developers to build housing that buyers can afford. However, commercial real estate and construction activity in these areas remains strong and has kept demand for contractors, subcontractors, and materials well beyond the available supply.

Financial Institutions
Twelfth District banking conditions continued to be strong. Respondents reported that bank capital and liquidity were in ample supply and competition for loans remained fierce, with quality borrowers receiving excellent terms and rates. On the other hand, some respondents noted that overall consumer credit quality has deteriorated as borrowers continue to overextend themselves through excess credit card usage. Despite ongoing bank consolidation, the pool of available labor for the financial industry continued to tighten. In some areas of the District, labor shortages have induced banks to convert part-time positions to full-time jobs in an effort to attract employees.

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Last update: December 3, 1997