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Federal Reserve Districts

Twelfth District--San Francisco

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The reports suggest that the Twelfth District economy experienced little or no growth during the survey period of June through early July. Upward price pressures remained severe for food and energy-intensive items but were moderate otherwise, and wage pressures eased further. Retail sales were sluggish, and demand growth slowed further for service providers. Manufacturing activity expanded on net, while sales remained strong for agricultural items and most natural resource products. Housing markets showed no signs of recovery from their prolonged slump, and demand for commercial real estate continued to weaken. Contacts from financial institutions indicated that loan demand and credit quality fell slightly on net.

Wages and Prices
Price inflation was moderate for most items, although increases in food and energy prices continued to put upward pressure on overall inflation. Final prices for many retail items were largely stable or down, partly due to extensive discounting, although some contacts noted that upward price pressures have been building and will cause increases in final prices in coming months. Prices continued to increase for many commodities and raw materials, such as steel, aluminum, and titanium, and rising fuel prices have resulted in larger and more widespread fuel surcharges among providers of transportation services.

Upward wage pressures generally eased further, with contacts noting only slight increases in overall labor costs. The reduction in wage pressures was widespread but was particularly pronounced in sectors that have seen the largest drops in labor demand, such as construction, finance, real estate, and retail. However, demand and wage growth remained strong for selected groups of skilled workers, notably those with skills related to advanced technologies.

Retail Trade and Services
Retail sales were weak on net, although a few respondents pointed to a slight upward blip relative to the previous survey period that reportedly was fueled by federal tax rebates. Sales remained at low levels for department stores and many smaller retail outlets, causing inventories to rise. Discount chains continued to outperform conventional department stores, generally registering modest sales gains. As in other recent survey periods, respondents pointed to increases in food and energy prices as a restraining factor on sales of other products. Sales of furniture and household appliances remained exceptionally sluggish, and unit sales of gasoline fell further. Demand remained very weak for new and used automobiles, particularly larger, fuel inefficient models; dealers have grown reluctant to accept trucks and SUVs as trade-ins on purchases, due to a reported "collapse" in the wholesale market for these vehicles.

Demand growth for service providers slowed further. While growth continued at a moderate pace for providers of health-care services, demand remained soft for providers of advertising, professional, and legal services. For providers of real estate services such as title insurance, conditions were described as "grim" and employment reductions continued. Tourist activity was flat to down in general, with noticeable declines reported for Hawaii, and contacts expect further weakening over the balance of 2008. Airlines struggled with reduced travel demand and higher fuel costs, and contacts noted plans for further cutbacks in flights.

District manufacturing activity was mixed across sectors but appeared to expand on net during the survey period of June through early July. New orders have slowed for makers of commercial aircraft and parts, but production activity remained at high levels due to extensive order backlogs. Reports from semiconductor manufacturers indicated moderate growth in revenues and high rates of capacity utilization. Manufacturers of heavy equipment reported solid demand and favorable profit margins, but makers of wood products continued to scale back output and employment. Production activity at petroleum refineries was reported to be near its five-year low, and gasoline inventories were at average levels. Food manufacturers continued to operate at or near peak capacity in response to continued robust demand, although high commodity and fuel prices reportedly ate into their profits.

Agriculture and Resource-Related Industries
Demand remained robust for agricultural items and natural resources. Sales grew at a brisk pace for a variety of crops and livestock products, due in part to strong export demand. However, producers remained challenged by high prices for fuel and other inputs, and in parts of California extensive wildfires reportedly undermined growing conditions. High demand for various minerals and petroleum products prompted further expansion of extraction activity and capacity, including reutilization of previously dormant oil wells.

Real Estate and Construction
Activity in District housing markets remained stuck at very low levels during the survey period, while demand for nonresidential real estate continued to ease. Demand for new and existing homes remained exceptionally weak, fueling further price declines, especially in parts of California, Arizona, and Nevada that also have seen sharp increases in home foreclosures. Some reports indicated that builders are using a variety of incentives, such as covering buyers' closing costs, to whittle away at their unsold inventories. Conditions weakened further on the nonresidential side, with contacts noting a steep reduction in the total value of commercial construction permits in San Diego and an ongoing reduction in rental demand for commercial real estate in San Francisco.

Financial Institutions
District banking contacts reported that loan demand fell slightly on net relative to the previous survey period. Reports on commercial and industrial lending were mixed, with some contacts reporting a noticeable pullback in demand and others reporting steady conditions, suggesting slight easing overall. Demand for residential mortgages was reported to be very weak, and lending standards remained quite restrictive for residential mortgages and construction loans. Credit quality deteriorated a bit further, mainly for real estate and construction loans, with community banks feeling the greatest impact.

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Last update: July 23, 2008