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Federal Reserve Districts

Twelfth District--San Francisco

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Reports from Twelfth District contacts suggest that economic growth was sluggish during the period from March through early April, with limited negative effects arising from the start of military operations in Iraq. Price and wage pressures were minimal, and retail gasoline prices largely remained at elevated levels. General retail sales held up on net, though they appear to have weakened a bit toward the end of the survey period, partly due to concerns about the war in Iraq. The war, along with the East Asian outbreak of the respiratory ailment "SARS," had a discernible negative effect on travel and tourism activity, especially visits from abroad. Demand for high-tech equipment and other District manufactured products fell slightly on net, and respondents noted significant excess capacity for various products. Sales of agricultural products were solid, due in part to strong export demand, and contacts reported capacity expansion in the fuel and energy sectors. Although commercial real estate markets weakened further, home demand was strong, although slower activity was reported in some markets. Banks and other financial intermediaries saw continued weak demand for business loans and strong demand for residential mortgages.

Prices and Wages
District contacts reported little upward pressure on wages and prices in the most recent survey period, except for increases in employer benefit costs and the price of transportation services. Despite a recent decline in oil prices, retail fuel prices fell only slightly from elevated levels established in early March. Providers of transportation services passed on some of the increased fuel costs to customers, and shipping costs rose due to delays associated with tightened security procedures related to imports. More generally, upward price pressures were quite limited, as stiff competition forced many retailers and service providers to offer their products at discounted prices. Although rising prices for health insurance increased employer costs for employee benefits, wages reportedly were flat to down a bit, as most labor markets were characterized by significant excess supply.

Retail Trade and Services
Demand for retail goods and services weakened a bit compared to the previous survey period. Retail sales were largely stable on net, and contacts noted that consumer spending held up better after the start of the war in Iraq than it did following the start of Operation Desert Storm in 1991. Sales of new and used automobiles and light trucks were described as robust for the survey period as a whole, though some dealers noted a pause in activity when the military conflict began. Retail inventories in general have been kept lean in recent weeks, and one contact reported cancellations of apparel orders by some department stores.

Travel and tourism activity fell noticeably in some areas in response to the start of the war and the outbreak of the SARS epidemic in East Asia. Respondents reported extensive reservation cancellations and lower hotel occupancies in Los Angeles, Hawaii, and other areas, largely due to a decline in visitor arrivals from East Asia. Moreover, airlines cut flights on selected Asian and European routes in response to a decrease in bookings and lower passenger load volumes. Domestic travel also remained weak. Outside of travel-related industries, service demand was largely stable, with robust conditions reported for health care and related services.

District manufacturers struggled with somewhat weaker sales and significant excess capacity during the survey period. Demand for most technology products was sluggish and perhaps fell a bit, as businesses further delayed upgrades to their existing stocks of computer, networking, and communications equipment. Capacity utilization reportedly was low for all but the most advanced technology products, and utilization was well below preferred levels in other industries, such as machine tools and food processing. Inventories of unused planes were at high levels, which undercut demand for new commercial aircraft. Due to high production and a steady flow of Canadian imports, lumber prices reportedly were at twelve- to fifteen-year lows, which may lead to curtailed domestic production going forward. Among manufacturers reporting modest strength, such as providers of construction equipment and building materials, demand increases have been met largely through the use of overtime hours rather than through the hiring of new employees.

Agriculture and Resource-related Industries
District agricultural and resource-related businesses reported solid demand in recent weeks. Sales and prices of tree fruits and nuts were strong, spurred in part by continued strong export demand, and favorable weather produced healthy growing conditions for many West Coast crops. Contacts noted substantial new investments and expanded capacity for extraction of oil and natural gas, along with plans for new electrical generation facilities in some areas.

Real Estate and Construction
Demand for commercial real estate remained stagnant in most areas, while residential market activity continued at high levels overall, despite scattered signs of cooling. Office vacancy rates generally remained high, and rental rates fell further in some areas. However, vacancy rates for commercial space improved a bit in Southern California and Hawaii, where overall economic conditions have been relatively favorable. Home sales continued at a rapid pace in most areas, fueled in large part by low mortgage interest rates. However, the pace of sales growth and price appreciation fell slightly in some areas, most notably in Utah. Moreover, citing a weak economy and economic uncertainties related to the war in Iraq, a few District developers have delayed planned construction projects in recent weeks, including several multifamily housing developments that were put on hold in Salt Lake City.

Financial Institutions
Contacts reported generally weak loan demand by businesses but strong demand for new residential mortgages and extensive refinancing activity for residential and commercial real estate loans. In contrast to most areas, banks in Southern California and Hawaii saw steady growth in commercial loans. The volume of residential mortgage loans remained high but fell a bit in some areas, notably in Utah. Credit was amply available for low-risk borrowers throughout the District.

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Last update: April 23, 2003