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Federal Reserve Districts

Twelfth District--San Francisco

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Economic activity in the Twelfth District appears to have changed little during the survey period of late April through the end of May.  Upward price pressures were subdued for most products but remained severe for food and energy-intensive items, while wage pressures continued to ease in some sectors.  Retail sales were weak and demand growth slowed for service providers.  Manufacturing activity held steady or grew slightly on net, while producers of agricultural and natural resource products saw strong sales.  Housing markets remained exceptionally weak despite scattered reports of improved sales, and demand for commercial real estate continued to soften in some areas.  Banks and other financial institutions reported that loan demand was largely unchanged or fell slightly on net, and credit standards tightened further.

Wages and Prices
Price inflation was modest for most products but remained high for food and energy-intensive items.  Final prices for many retail items were largely stable or down.  However, continued price increases for some commodities and raw materials, such as steel and copper, are increasingly being passed through to final prices for various goods.  In addition, many providers of transportation services have been passing on higher fuel prices through surcharges.

Upward wage pressures were limited, with contacts noting only small increases in overall labor costs.  Reports indicated additional easing in wage pressures in sectors that have seen reduced labor demand, such as construction, finance, retail, and real estate.  However, wage increases remained rapid for skilled workers in selected sectors, such as computer services.

Retail Trade and Services    
Retail sales held steady or softened further, with many respondents pointing to increases in food and energy prices as a restraining factor on sales of other products.  For department stores and many smaller retail outlets, sales remained at low levels, causing inventories to rise and resulting in aggressive price discounting.  Demand was firmer for discount chains than for traditional department stores, and demand for consumer electronic products remained strong.  Gasoline sales volumes were below their levels from 12 months earlier and continued to fall during the survey period.  Demand remained very weak for new and used vehicles, especially for larger vehicles with low fuel efficiency, for which sales were described as "dismal."

Demand growth for service providers slowed further on net.  Growth continued at a moderate pace for providers of health-care services.  Demand weakened for providers of advertising and professional services, although one contact noted that demand for business enterprise software has "stabilized" after declining in earlier reporting periods.  Providers of real estate services, such as title insurance, faced very low levels of activity and continued to reduce employment counts.  The tourism industry saw mixed but somewhat weak performance on net. Hotel bookings and visitor spending were characterized as weaker or declining in Southern California and also in Hawaii, where recent airline bankruptcies reportedly have held down visitor counts; in contrast, hotel occupancy rates in parts of Alaska have been at record levels.

District manufacturing activity appeared to hold steady or grow slightly on net during the survey period of late April through the end of May.  New orders have slowed for makers of commercial aircraft and parts, although production activity remained at high levels due to existing order backlogs.  Semiconductor manufacturers continued to report moderate growth in revenues accompanied by balanced inventories and high rates of capacity utilization.  Manufacturers of heavy equipment saw largely stable demand on net, with strong sales of farm equipment noted.  By contrast, makers of wood products continued to scale back production activity and employment.  Petroleum refiners had been operating at relatively low utilization rates, but production activity rose recently.  Food manufacturers saw further growth in output and sales, but high commodity and fuel prices have crimped profit margins.

Agriculture and Resource-related Industries
Demand and sales grew at a strong pace for agricultural items and natural resources.  Domestic and overseas sales remained robust for a variety of tree and row crops and for livestock, and profits are expected to be abundant this year despite some offset due to high prices for inputs such as seeds and fertilizer.  Oil and natural gas extraction expanded further in response to growing demand, although these activities reportedly were constrained slightly by tight availability of some types of equipment and materials.

Real Estate and Construction
Housing markets remained exceptionally weak during the survey period, while conditions in nonresidential real estate markets softened a bit further.  Unsold inventories of new and existing homes remained at unusually high levels in most areas, causing further price drops, especially in parts of California, Arizona, and Nevada that also have seen sharp increases in home foreclosures.  Scattered reports pointed to a recent pickup in home sales, which was attributed to increased affordability due to lower prices.  On the nonresidential side, conditions weakened a bit further in some areas, with contacts noting reduced leasing activity and lower sales prices for commercial properties in the San Francisco Bay Area and further increases in vacancy rates for commercial property in Las Vegas and San Diego.

Financial Institutions
District banking contacts reported that lending activity was largely flat or fell slightly relative to the previous survey period.  Reports on commercial and industrial lending suggested a slight easing overall, with some contacts reporting weak demand and others reporting little change.  Lenders continued to tighten credit standards, which remained especially strict for residential mortgages and construction loans.  Credit quality eroded a bit further, mainly for loans related to the housing sector, with the most significant adverse impacts on asset portfolios noted for smaller community banks.

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Last update: June 11, 2008