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Federal Reserve Districts

Twelfth District--San Francisco

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Economic activity in the Twelfth District remained subdued during the survey period of late July through late August. Upward price pressures eased for food and energy-intensive items, but price inflation remained significant overall, while wage pressures fell further. Most retailers saw sluggish sales, and demand for services weakened. Manufacturing activity was mixed across sectors but appeared to expand on net, while demand remained strong for agricultural products and natural resources. The prolonged slump in District housing markets continued, and demand for commercial real estate remained somewhat weak. Contacts from financial institutions indicated that loan demand and credit quality slipped a bit further.

Wages and Prices
Upward price pressures remained significant. Despite slower price increases or lower levels for some foods and especially energy products, their prices remained elevated and continued to exert upward pressure on prices for related final products. Upward price pressures have eased for various raw materials but price levels remained high for some, notably steel and copper. Prices for many retail items were held down by extensive discounting, although a few contacts reported that they raised prices in response to earlier increases in input prices.

Upward wage pressures eased further. Firms in most sectors have been reducing staff counts through layoffs or attrition, with particularly pronounced drops continuing in the construction, finance, and real estate sectors. The resulting labor market slack has reduced upward wage pressures in general, with the exception of workers with specialized skills in a few sectors such as resource extraction and information technology. Several contacts reported upward pressure on overall labor costs due to substantial increases in the costs of health benefits.

Retail Trade and Services
Retail sales remained sluggish. Respondents pointed to high prices for food and fuel as a primary factor underlying the generally weak sales performance of discretionary items such as clothing and jewelry. For department stores and many smaller retail outlets, sales were weak and inventories rose. Demand remained stronger for discount chains than traditional department stores, as consumers offset price increases on food and fuel by switching to lower-priced items in other retail categories. Consumer electronic products continued to sell well in general. Retailers of furniture and household appliances reported exceptionally poor sales, and unit sales of gasoline remained weak. Demand dropped further for new automobiles, especially domestic models with low fuel efficiency.

Demand for services appeared to decline slightly compared with the previous survey period. Health-care providers reported a drop in demand, with some medical centers reducing staff counts in part by leaving vacant positions unfilled. Demand remained soft for providers of professional and legal services and fell further for providers of advertising services. Conditions remained "dismal" for providers of real estate services such as title insurance, with cumulative employment reductions reportedly in the range of 40 to 50 percent over the course of the ongoing real estate slump. Tourist activity was flat to down in major tourist destinations such as Southern California and Las Vegas and down significantly in Hawaii, and airlines continued to struggle with reduced travel demand and elevated fuel costs.

District manufacturing activity was mixed across sectors but appeared to expand overall during the survey period. Production activity was at high levels for makers of commercial aircraft and parts as they continued to work through extensive order backlogs. Makers of semiconductors and other information technology products saw moderate sales gains and high rates of capacity utilization; semiconductor inventories reportedly rose slightly. Manufacturers of wood products made further cuts in production activity and employment. Capacity utilization at petroleum refineries remained well below its five-year average, and inventories have been above average. Sales reportedly grew at a moderate pace for food manufacturers, although some faced challenges to their bottom lines due to high input prices.

Agriculture and Resource-related Industries
Strong demand and sales continued for agricultural items and natural resources. Sales continued at a brisk pace for most crops, especially those with extensive overseas markets such as grains and cotton, and sales of livestock products were reported to be at record levels. However, the high prices of fuel, feed, and fertilizer continued to crimp profit margins and reportedly caused some farmers and ranchers to scale back or shut down. Overall demand remained high for petroleum products, with further expansion in extraction activity noted.

Real Estate and Construction
The slump in District home demand and construction activity continued, while demand for commercial real estate remained somewhat weak. Demand for new and existing homes continued to languish, resulting in further price declines. These effects have been especially pronounced in areas that have experienced high levels of home foreclosures, such as parts of Arizona, California, and Nevada, although lower prices reportedly stimulated sales increases in some areas. Demand for nonresidential real estate was reported to be little changed from the previous survey period but was down relative to twelve months earlier. A few contacts noted that construction activity for public projects such as highways has been maintained or increased of late.

Financial Institutions
District banking contacts reported that loan demand fell on net relative to the previous survey period. Scattered reports indicated that some businesses have sidelined expansion projects, resulting in a pullback in the demand for commercial and industrial loans. Demand for new residential mortgages continued to be very weak, and lending standards remained quite restrictive for residential mortgages and construction loans. Asset quality deteriorated a bit further on net, with scattered reports of more severe deterioration and concerns about additional bank failures, especially among community banks that have been stressed by poorly performing construction loans.

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Last update: September 3, 2008