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Federal Reserve Districts

Twelfth District--San Francisco

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Economic activity in the Twelfth District appears to have been largely flat on net during the survey period of March through the beginning of April. Upward pressures on labor costs continued to moderate in some sectors, while upward price pressures were subdued for most products but remained strong for food and energy-intensive items. Retail sales weakened further and demand growth for services continued to slow. Manufacturing activity was mixed across sectors but appeared to hold steady on net, while agricultural producers saw solid growth in sales. Demand for residential real estate remained exceptionally weak, and demand for commercial real estate softened a bit in some areas. Banking contacts reported that loan demand was largely unchanged or fell slightly on net and credit standards tightened further.

Wages and Prices
Price inflation was modest overall, but upward pressures remained strong for food and energy products. Final prices were stable or down for most retail items, and prices fell further for selected building materials, especially wood products. By contrast, high prices for energy-related inputs and some raw materials, such as steel and resin, created upward pressures on final prices for transportation services and assorted categories of manufactured and agricultural products. Prices for various agricultural commodities and food continued to rise rapidly.

Wage pressures were modest in general, with contacts noting only small increases in overall labor costs. Upward wage pressures moderated further in sectors that have seen reduced labor demand in recent months, such as construction, retail, finance, and real estate. However, wage increases remained rapid for engineers and other highly skilled technical workers in selected manufacturing industries, such as aerospace, and in computer and software services.

Retail Trade and Services
Retail sales continued to soften. The pace of sales slowed at department stores and for a variety of smaller retail chains, causing inventories to rise further above desired levels and some retailers to cancel orders for new goods. Discount chains reportedly performed better than traditional department stores, although one contact pointed to a surprising degree of strength for luxury goods. The volume of gasoline sales was reported to be down significantly compared with 12 months earlier. Sales of new automobiles and light trucks were very slow for both imported and domestic makes, and demand for used vehicles weakened significantly, with one report pointing to a "collapse" in March.

Demand growth for service providers eased overall. Growth continued at a moderate pace for providers of health-care services. However, for providers of real estate services, such as title insurance, activity remained at very low levels and contacts reported significant contractions in employment. Demand for advertising has been on a downward trend, and contacts in software services reported that sales slowed as businesses scaled back their spending on information technology equipment. Travel and tourism activity rebounded a bit in Hawaii, with gains in visitor counts and spending evident relative to 12 months earlier. By contrast, in Southern California, hotel bookings for the spring and summer have been running significantly below their levels from last year, and in Nevada casino revenues recently recorded their slowest growth rate in four years.

District manufacturing activity was mixed across sectors but appeared to hold steady on net during the survey period of March through the beginning of April. Production activity and new orders remained strong for makers of commercial aircraft and aerospace products used for national defense. Semiconductor manufacturers reported moderate growth in revenues accompanied by balanced inventories and high rates of capacity utilization, with solid growth in unit sales propelled in part by robust overseas demand. Demand growth for food manufacturers reportedly ranged from moderate to strong. By contrast, lumber mills continued to curtail production and shed jobs in the Pacific Northwest, and demand remained weak for District apparel makers.

Agriculture and Resource-related Industries
Demand and sales grew further for agricultural products. Solid growth in domestic and overseas sales pushed revenues higher for a variety of tree and row crops and also for livestock, although these gains were partly offset by cost increases arising from higher prices for grain, fertilizer, and petroleum-based inputs in general. Contacts in Southern California reported concern over pending cuts in water deliveries caused by a prolonged drought in the Colorado River Basin, which may curtail spring plantings.

Real Estate and Construction
Conditions in District housing markets remained exceptionally weak during the survey period, while demand for nonresidential real estate eased a bit further. Demand for new and existing homes was very weak, and contacts reported rising foreclosure rates in parts of California, Nevada, and Arizona. Prices continued to fall noticeably in the weakest areas, and they have flattened or begun to fall in other areas that had shown resilience well into 2007, such as Utah and parts of the Pacific Northwest. On the nonresidential side, activity slowed a bit further. Contacts reported reduced demand and lower prices for commercial properties in the San Francisco Bay Area, further increases in commercial vacancy rates in Las Vegas, and sluggish nonresidential construction activity in the San Diego area.

Financial Institutions
Reports from District banking contacts suggest that lending activity was largely flat or fell slightly relative to the previous survey period. Reports on commercial and industrial lending were mixed, with little change reported in some areas and declines reported in others, suggesting a slight decline on net. Refinancing activity for home mortgages picked up a bit further, but demand for new mortgages remained at very low levels. Lending standards remained quite restrictive for residential mortgages and construction loans and they tightened a bit further for consumer and business borrowers in general.

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Last update: April 16, 2008