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Federal Reserve Districts

Twelfth District--San Francisco

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The Twelfth District economy expanded at a solid pace from mid-April through the beginning of June, with slight moderation evident in some sectors. Wage and price inflation reportedly were modest on net, although wage growth remained rapid for selected worker groups with specialized skills. Retail sales expanded somewhat and demand for services was strong. Demand for District manufactured products grew overall but fell for some construction materials. Producers of agricultural and resource-related products saw solid demand. Residential construction, sales activity, and price appreciation softened further, while demand for commercial real estate continued to expand. District banks reported strong loan demand on net but further easing in mortgage demand; credit quality remained very high.

Wages and Prices
Contacts reported little or no change from the modest upward pressure on prices noted in the previous survey period. Significant increases in final prices were largely confined to products and services for which energy costs are a significant component, such as construction and transportation services. More generally, contacts reported that vigorous competition and ongoing productivity gains sharply limited their ability to pass rising input costs on to final prices, although they provided scattered reports of increased pricing power for some retail items.

District labor markets tightened a bit further during the survey period. Upward wage pressures were moderate overall, but wage increases remained rapid for workers with specialized skills in the construction, health-care, information technology, and financial services sectors. More generally, contacts reported healthy hiring activity, although the pace of hiring has slowed in parts of California.

Retail Trade and Services
Retail sales grew modestly during the survey period. Demand for domestic automobiles reportedly improved in recent weeks, although sales remained below year-earlier levels as high gas prices held down demand for large SUVs and light trucks. By contrast, sales of selected fuel-efficient imported vehicles reportedly remained at record highs. Sales of apparel and other small retail items expanded, although performance varied substantially across retailers.

Most service providers saw robust demand. Activity was brisk in the health-care services, professional services, and transportation sectors. Sales and hiring activity grew further for providers of technology services, although the employment outlook in this sector was clouded slightly by a report of reduced use of temporary employees. District travel and tourist activity was vigorous. In Hawaii, substantial increases in domestic tourist arrivals and spending offset recent declines in Japanese tourist activity relative to year-earlier levels. For major District tourist destinations in general, hotel occupancy rates remained high and room rates rose further.

Demand for District manufactured products grew further on net. Orders and sales of semiconductors continued to expand, and capacity utilization generally hovered at or above 90 percent. Orders for commercial aircraft grew further and production continued at a rapid pace in the Pacific Northwest, keeping aircraft manufacturing establishments and their subcontractors operating near full capacity. Demand for processed food grew further and demand for apparel picked up, with balanced inventories reported in both sectors. In contrast, demand declined and prices fell slightly for building supplies commonly used for residential construction purposes, most notably wood products.

Agriculture and Resource-related Industries
Demand for District agricultural and resource-related products was strong during the survey period of mid-April through the beginning of June. Sales remained robust for most crops and livestock; inventories were balanced in general and prices were stable to down slightly, despite supply constraints imposed by continued drought conditions in Arizona and earlier excess moisture in California. Contacts reported that the cost of fuel and fertilizers increased further from high levels, although the rate of increase abated. In the resources sector, producers of oil and natural gas saw robust demand and operated at close to full capacity, although one contact noted that inventories of natural gas are very high, putting downward pressure on prices.

Real Estate and Construction
Activity in residential real estate markets continued to decelerate, while demand for commercial real estate picked up further. The pace of sales and price appreciation, along with other indicators such as time on the market, point to significant cooling in residential real estate markets in most areas; the exceptions are Utah and parts of the Pacific Northwest, where housing markets reportedly remain hot. On the commercial side, office and retail vacancy rates fell and rental rates rose further in most major markets. Overall construction activity was at high levels, with rising activity for commercial and public structures offsetting declines for residential construction projects in some areas. Contacts reported that some builders continued to face cost increases and minor project delays as a result of tight availability of skilled workers and selected materials such as steel and cement.

Financial Institutions
District banking contacts reported robust demand in most loan categories, with the exception of declining demand for residential mortgages. Commercial and industrial lending continued to grow steadily, and asset quality remained excellent. Originations for new residential mortgages fell, but contacts reported that home refinancing activity was brisk in some areas, as borrowers switched from variable to fixed terms in the face of rising interest rates.

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Last update: June 14, 2006