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Federal Reserve Districts

Twelfth District--San Francisco

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The Twelfth District economy continued to expand at a moderate pace during the survey period of mid-April through late May. Overall price inflation was modest; growth in labor compensation generally remained moderate despite tight labor markets, although contacts noted further hefty salary increases for selected worker groups with specialized skills. Retailers in general reported moderate sales gains, while demand growth was strong for most categories of services. Manufacturers' reports were somewhat mixed but positive on balance, and agricultural producers reported solid sales. Housing market activity remained sluggish, but activity in commercial real estate markets picked up further. Banks saw further growth in loan demand with the exception of residential mortgages.

Wages and Prices
District contacts reported that overall price inflation was modest. Recent increases in the costs of energy and selected raw materials such as titanium and zinc created upward price pressures for providers of transportation services and assorted manufactured goods. By contrast, ongoing price declines for products in very competitive markets, notably apparel and electronic goods, helped to hold down overall inflationary pressures.

Growth in labor compensation was moderate overall, although it remained rapid for selected worker groups with specialized skills and in areas with very tight labor markets. More generally, tight labor markets have led employers to devote increasing effort and resources to attracting and retaining skilled workers. Contacts noted that productivity increases have helped to ease labor cost pressures in some sectors, and they expect little or no change in the rate of productivity growth this year compared with last year.

Retail Trade and Services
District retail sales continued to grow at a moderate pace on net, with most contacts indicating no change in the growth of consumer spending thus far in the second quarter relative to the first quarter. Retail sales grew at department stores and other major retail chains, and luxury items sold relatively better than lower-end items. By contrast, demand fell further for products used for home improvement. Recent increases in retail gasoline prices reportedly restrained consumer spending a bit in some areas. Automobile sales were little changed from the previous survey period. Both foreign and domestic automakers offered substantial discounts and other incentives to lure customers, and foreign models, especially fuel-efficient vehicles, continued to fare better than domestic models.

Service providers generally reported solid demand, with robust sales in the food and beverage, information technology, and health-care sectors. However, scattered reports indicated reduced demand for transportation services. Travel and tourism activity was at high levels in key District locales, but it has slowed in Hawaii after two record-breaking years, reflecting a modest decline in domestic tourism and a sharp decline in visits by Japanese tourists.

Reports from District manufacturers were mixed but positive on balance during the survey period of mid-April through late May. Producers of commercial aircraft and their suppliers saw very strong demand and operated at or near full capacity to meet growing order backlogs, while orders grew modestly for products related to national defense. Apparel and food manufacturers continued to report solid sales. Makers of industrial equipment reported largely "steady" conditions, with perhaps a slight slowdown in the pace of new orders. Sales remained weak for makers of building materials, household appliances, and furniture. Semiconductor sales were up in unit terms compared with the same period last year, although price declines have held down revenue growth, and capacity utilization reportedly has dropped a few points since early 2007.

Agriculture and Resource-Related Industries
Demand for agricultural products grew at a solid pace and production conditions were stable overall. Strong demand for most specialty and commodity crops resulted in further sales growth and higher prices for these items compared with the same period last year. However, drought conditions and higher costs for feed grains have prompted cattle suppliers to accelerate the pace at which cattle are brought to market, offsetting rising demand and leading to lower cattle prices. More generally, contacts reported modest cost increases for agricultural inputs, with mixed reports regarding cost pressures associated with recent changes in energy costs.

Real Estate and Construction
Housing market activity remained sluggish, while activity in commercial real estate markets picked up further. In most areas, sales volumes for new and existing homes fell a bit further, and average time on the market rose slightly. Price appreciation slowed accordingly, with modest price declines reported during the survey period in some parts of the District. However, prices continued to rise in some states and areas where local economic conditions are strong, such as Utah, Idaho, Hawaii, and the Seattle area. On the commercial side, vacancy rates for office and industrial space fell further and rental rates continued to rise in most District cities; one exception is Las Vegas, where office vacancies rose recently due to increased supply. Construction activity for commercial and public projects expanded in some areas, partly offsetting declines in residential construction activity. Several contacts noted that the costs of construction materials continued to rise in general despite the slowdown in homebuilding.

Financial Institutions
Contacts in the banking sector reported further growth in loan demand on net. Demand for commercial and industrial lending as well as commercial real estate loans rose but was partly offset by further weakening in demand for residential mortgages in most areas. Credit quality was at favorable levels overall, but it deteriorated slightly for home mortgages in some areas. Contacts noted continued growth in venture capital funding and private equity financing.

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Last update: June 13, 2007