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Federal Reserve Districts

Twelfth District--San Francisco

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Reports from Twelfth District contacts indicated a modest increase in overall economic activity in late July and August, representing an improvement in the pace of growth. With the notable exceptions of health care services and energy, contacts noted little upward pressure on prices and wages. Retailers reported that sales were generally up and that discounting was less pervasive than in past survey periods. The District's software services, travel, and tourism sectors saw improvements. Reports indicated that manufacturing activity continued to rise; orders strengthened for manufacturers of semiconductors, machine tools, and basic metals. Conditions for District agricultural and resource-related businesses remained solid. Respondents indicated that demand for homes continued to be strong, while commercial real estate generally remained in the doldrums. Banking contacts reported some slight improvements in commercial loan originations, particularly among small businesses, and a sharp decline in mortgage refinancing in response to the rise in long-term interest rates.

Prices and Wages
District respondents reported that prices for final goods and services exhibited very little upward movement in the most recent survey period. Exceptions to this pattern were for health care services, natural gas, and gasoline. Contacts noted ample labor supply and little upward pressure on wages in most areas. In contrast to wages, several employers noted that they continued to face pressure from increases in non-wage labor costs such as health insurance benefits and workers' compensation and liability insurance, particularly in California.

Retail Trade and Services
Reports from District retailers indicated improved sales during the most recent survey period. Contacts reported solid automobile sales (spurred in part by generous incentives), especially for foreign brands. Favorable financing terms and strong home sales helped prompt sales of large appliances. Discounting among retailers reportedly was less pervasive than in previous survey periods. In response to stronger sales, a big-box retailer finally acted on its expansion plans and proceeded with the construction of additional stores in the Pacific Northwest.

Demand for several other District services strengthened a bit. Of note, contacts indicated that demand for both air and water transportation services trended up. Additionally, new orders for some software and media services increased slightly, with the exception of enterprise software where business is still very slow. District service providers reported a slight increase in demand for both part-time and full-time employees in IT services. On the downside, telecommunications service providers continued to be plagued by soft sales and excess capacity. About an equal number of District retailers and service providers planned to either increase or leave capital spending unchanged, while only a small number expect capital spending to decrease in the near term.

Reports indicated that conditions in the District's travel and tourism sectors improved slightly in late July and August. In Hawaii, increases in domestic visitor counts largely offset declines by international visitors. Hotel occupancy rates inched up in Hawaii, California, and other areas. However, the restaurant industry continued to face below-normal demand in some markets.

Overall District manufacturing activity picked up in late July and August. Demand for semiconductors improved and capacity utilization, particularly for leading-edge products, reportedly remained high. Respondents noted that semiconductor prices increased slightly, although competition held down prices for most IT products. Producers of other manufactured products, such as machine tools and basic metals, also reported improved orders. Consistent with improved conditions, a majority of manufacturing respondents indicated plans to increase total capital spending and spending on IT in the next several months.

Agriculture and Resource-related Industries
Agricultural contacts noted continued strength in export activity. Respondents reported stable prices overall for crops and livestock. Demand for natural gas was boosted by hot weather in late July and August. Also, poor water conditions are expected to reduce the amount of hydro-power and increase the demand for natural gas. In response, natural gas prices rose in recent weeks, and rig counts and extraction have been increasing. Gasoline prices in the district also increased as a result of a break in an Arizona pipeline.

Real Estate and Construction
Housing demand remained a bright spot in the District's economy. New home construction continued at a brisk pace across the District, particularly in areas where demand exceeded supplies, namely Hawaii and Southern California. Several respondents believed that housing demand increased as some home buyers rushed into the market fearing that interest rates may escalate further.

On the commercial side, high vacancy rates continued to characterize many District markets, including the San Francisco Bay Area and Las Vegas. Contacts reported very little commercial construction activity outside of Hawaii and Southern California.

Financial Institutions
Throughout the District, increased interest rates have sharply reduced mortgage refinancing activity, although originations for new mortgages remained strong. Contacts reported some signs of improvement in the demand for commercial loans, particularly among small businesses. Respondents noted that some of the pickup in commercial loan demand likely owes to anxiety over possible future increases in interest rates. Finally, a majority of District banks reported plans to increase total capital spending as well as spending on IT in the next several months.

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Last update: September 3, 2003