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Federal Reserve Districts

Twelfth District--San Francisco

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Economic activity in the Twelfth District weakened further during the survey period of September through early October. Retail sales were very sluggish on net, and demand fell for most categories of services. Manufacturing activity slowed, but sales continued to grow for agricultural products and natural resources. Activity in District housing markets generally remained anemic, and demand for commercial real estate weakened further. Contacts from financial institutions reported a decline in loan demand and credit quality, along with a drop in credit availability. Upward pressures on prices remained significant overall, due to the delayed influence of past increases in the prices of energy and selected commodities.

Wages and Prices
Despite some easing of late, upward pressures on prices remained substantial. Prices on energy and selected commodities, including food products and some raw materials, have come down from their recent highs. However, these prices generally remained at elevated levels and continued to exert substantial upward pressure on overall final prices, due to the delayed effects of earlier price increases. Prices for many retail items were held down by extensive discounting, but some contacts cautioned that pending increases have been working their way through the supply chain and will reach consumers late this year and in 2009.

Wage pressures eased further as the degree of labor market slack deepened. Job cuts were reported across a wide range of industries, particularly in the construction, finance, and real estate sectors. As a result, unemployment rose throughout the District, and contacts noted that wages have been largely flat of late. The primary exception is worker groups whose skills enable them to use advanced technologies, for whom wage gains remained significant.

Retail Trade and Services
Retail sales were quite sluggish and appeared to fall during the survey period, despite the influence of the back-to-school shopping season. Sales remained weak and inventories rose further for department stores and smaller retail outlets alike. Discount chains continued to see stronger demand than traditional department stores, as consumers switched away from high-priced items and curbed discretionary spending; outdoor equipment such as camping gear was one bright spot, as households gravitated towards low-cost vacation options. Sales for retailers of furniture and household appliances continued to slide from already low levels, and unit sales of gasoline fell further. Sales fell considerably for all types of automobiles, both new and used, with reduced credit availability reportedly emerging as a significant constraint.

Demand for services fell further compared with the previous survey period. Health-care providers reported declining demand, with some medical centers noting a significant drop in cash collectibles recently. Sales weakened for providers of advertising, professional, and legal services, idling some workers and reducing capacity utilization. Activity remained moribund for providers of real estate services such as title insurance. Contacts noted modest declines in tourist activity in some major tourist destinations in the District, such as Southern California and Las Vegas; the drop was more significant in Hawaii and was accompanied by layoffs there.

District manufacturing activity slowed during the survey period of September through early October. Although manufacturers of commercial aircraft still faced an extensive backlog of orders, activity in that sector was sharply curtailed by an ongoing labor dispute. Makers of semiconductors and other information technology products continued to experience high rates of capacity utilization and moderate sales gains, but signs of a softening in global demand have emerged. Demand for wood products remained very weak, causing additional mill shutdowns. Activity at petroleum refineries continued at low levels, and capacity utilization remained well below its longer-term average. Capacity utilization also was very low among metal fabricators, for whom demand has weakened substantially. Firms in most sectors reported limited capital spending of late, with plans to hold flat or reduce spending during the balance of 2008.

Agriculture and Resource-related Industries
Demand and sales for agricultural items and natural resources continued to expand during the recent survey period. Brisk sales were reported for most crops, propelled in part by strong export demand. Demand remained solid for petroleum products, spurring further expansion of extraction capacity. However, the recent decline in oil prices has reduced the viability of some high-cost expansion projects, and the recent hurricanes in the Gulf of Mexico sharply curtailed capacity utilization for District companies with operations there.

Real Estate and Construction
The District's severe housing slump continued, while demand for commercial real estate eroded further. Demand and sales remained very weak for new and existing homes, and prices continued to fall. Foreclosure rates on existing homes, which were already high in parts of Arizona, California, and Nevada, rose noticeably in Utah and Idaho. Widespread availability of foreclosed homes at bargain basement prices spurred sales of existing homes to exceed their levels from twelve months earlier in some parts of California. Demand for nonresidential real estate fell, and limited credit availability reportedly constrained property purchases and the number and scope of projects that were underway in some areas. Vacancy rates on commercial space rose in Las Vegas and other major metropolitan areas. Contacts noted that the strongest construction activity by far was for public buildings such as hospitals and schools.

Financial Institutions
Lending activity and credit conditions weakened noticeably during the survey period. Demand for commercial and industrial loans fell further, and demand for new residential mortgages remained very weak. Credit availability declined significantly as banks and other financial institutions faced rising difficulties securing short-term funding. Contacts also pointed to higher delinquency rates in all loan categories. Banks and customers are taking steps to enhance deposit-insurance coverage of existing holdings by spreading deposits across multiple banks.

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Last update: October 15, 2008