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Federal Reserve Districts

Twelfth District--San Francisco

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Economic activity in the Twelfth District appears to have grown modestly during the survey period of early January through late February. Upward price pressures remained strong for food and energy but were limited for other products, and scattered reports pointed to slight easing in upward pressures on labor costs. Contacts reported weak sales of retail goods and slower demand growth for various categories of services. Manufacturing activity was mixed across sectors but appears to have expanded slightly on net, while agricultural producers saw continued solid growth in sales. Demand for residential real estate remained exceptionally weak, and demand for commercial real estate eased a bit further. Banking contacts reported that loan demand was little changed, while credit standards tightened further.

Wages and Prices
Price inflation was modest overall, although food prices continued on their upward march and energy prices remained highly elevated. Prices were largely stable to down for a variety of retail products, and they fell further for selected building materials, especially wood products. However, upward price pressures remained strong for various food products and energy-intensive items such as transportation services. Contacts also noted recent increases in the costs of raw materials used for clothing manufacturing.

Wage increases were moderate on net, with numerical reports generally in the range of 2 to 4 percent on an annual basis. Contacts provided scattered reports of reductions in upward wage pressures for sectors in which labor demand has eased of late, such as construction, retail, and finance. However, selected categories of skilled technical labor remained in short supply in some areas, and workers in these categories continued to receive large wage increases.

Retail Trade and Services
Retail sales softened further in the wake of a weak holiday season. Sales were slow at department stores and a variety of smaller retail chains, causing inventories to rise above desired levels; expectations of continued sluggish sales into the spring have prompted retailers to scale back merchandise orders and reduce staff in some cases. Demand fell further for household items such as furniture and appliances, although the drop reportedly was not as pronounced as it had been in previous survey periods. Sales of new automobiles were very weak for domestic and imported makes alike, with double-digit declines reported relative to year-earlier levels in some areas. Due to slow sales in recent months, some retailers have put selected capital spending projects on hold or reduced their capital spending plans for 2008.

Conditions weakened slightly for service providers. Utilization of health-care services continued to grow but at a slower pace than in prior months. Activity remained very low for providers of real estate services such as title insurance, and weakness in the real estate sector reportedly has held down demand for legal services in some areas. Travel and tourism activity fell a bit further from earlier high levels in Hawaii; however, tourist activity remained largely stable in the coastal areas of California, due in part to continued growth in foreign tourism spurred by the lower exchange value of the U.S. dollar.

Manufacturing activity varied by sector but appears to have expanded slightly on net during the survey period of early January through late February. Production activity and new orders grew further for makers of commercial aircraft and aerospace products used for national defense purposes. Semiconductor manufacturers reported continued moderate growth in sales accompanied by balanced inventories and high rates of capacity utilization. Food manufacturers saw double-digit sales gains relative to a year earlier. By contrast, apparel makers reported that sales and new orders were below expectations. Reports from various sectors indicated a cautious attitude towards new investments, with capital spending in 2008 likely to be flat to down compared with 2007.

Agriculture and Resource-related Industries
Demand for agricultural products continued to expand. Contacts reported solid growth in domestic and overseas sales for a variety of crops, although demand reportedly weakened recently for selected crops such as pecans. Input prices and availability were characterized as largely stable, although some farmers have been struggling with cost pressures due to high prices for fertilizers and other petroleum-based inputs.

Real Estate and Construction
Activity in residential real estate markets stayed stuck at very low levels during the survey period, while demand for nonresidential real estate eased a bit further. Demand for new and existing homes was little changed from the depths reached in recent survey periods, keeping transaction volumes exceptionally low; this caused prices to fall further in the weakest areas and flatten in areas that had exhibited resilience until well into 2007, such as Utah and parts of the Pacific Northwest. In contrast to the residential sector, construction activity and sales in the commercial and industrial sectors have been at high levels. However, a recent trend toward slight easing for commercial and industrial space continued during the survey period, with rising vacancies reported for Las Vegas and reduced rental demand noted for the San Francisco Bay Area.

Financial Institutions
District banking contacts reported that loan demand was little changed relative to the previous survey period. Reports on commercial and industrial lending were mixed across areas, with demand characterized as "strong" in some areas and declining in others. Lending for new residential mortgages remained very low, but contacts noted that refinancing of existing mortgages picked up, spurred by low interest rates. Credit standards remained very tight for real estate loans and tightened perceptibly for consumer and business borrowers more generally during the survey period. Like many other businesses, banks and other financial institutions recently have adopted a cautious approach to capital spending, limiting projects to those that are necessary to replace aging equipment or have short-run payoffs such as increased productivity.

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Last update: March 5, 2008