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Federal Reserve Districts

Twelfth District--San Francisco

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Economic activity in the Twelfth District weakened decidedly during the survey period of mid-October through late November. Upward price pressures eased overall because of declines in the prices of energy and some commodities and widespread discounting in the retail sector. Most retailers struggled with unusually weak demand on a seasonal basis, and demand for services continued to fall. Manufacturing activity slowed further. Agricultural sales generally continued at a brisk pace, but energy providers faced declining demand and falling output prices. Activity in District housing markets remained weak on net, and demand for commercial real estate continued to erode. Contacts from financial institutions reported weaker loan demand amidst sharply restricted credit availability and further tightening of lending standards.

Wages and Prices
Upward pressures on prices moderated during the survey period. Prices continued to fall for energy and selected commodities, including many food products and raw materials, and contacts noted declines in the prices of transportation services. Despite widespread declines in input prices, a few contacts noted the continued pass-through of past increases to final prices. Extensive discounting held down final prices for many retail items, and retailers anticipate further discounting, in line with expectations for an unusually weak holiday spending season.

Upward pressures on wages have largely disappeared. Contacts reported job cuts and hiring freezes across a wide range of industries, causing unemployment to rise in most areas. The few open positions have been attracting large numbers of applicants, thereby alleviating upward wage pressures. Wage gains have slowed markedly for worker groups who previously had seen rapid growth, notably those skilled in the use of advanced technologies.

Retail Trade and Services
Retail sales deteriorated further, and contacts expect significantly weaker holiday spending than in prior years. While sales remained largely stable for necessities such as food, contacts reported further declines in sales of big-ticket discretionary items such as furniture and household appliances and luxury items such as jewelry. Sales also slowed for electronic items and outdoor equipment, which had shown growth in recent survey periods. The sales slowdown was especially pronounced for traditional department stores, which have reduced inventories accordingly, but discount chains fared much better as consumers switched away from high-priced items. Sales fell further for all types of automobiles, and limited credit availability remained a significant constraint on purchases.

Demand for services declined further compared with the previous survey period. Providers of health-care services reported slower activity and concerns over their ability to issue debt to fund needed capital spending. Sales continued to weaken for providers of professional services such as advertising, legal services, accounting, and consulting. Providers of real estate services such as title insurance reported very low levels of activity, with further reductions in some areas. Travel activity fell in major District destinations: contacts from Southern California reported a rising incidence of canceled corporate meetings, and tourist visits and spending have dropped sharply in Hawaii. Restaurants throughout the District have seen their business drop off; some have closed, and more closures are expected in coming months.

District manufacturing activity slowed further during the survey period of mid-October through late November. Makers of semiconductors and other information technology products reported a recent slowdown in sales due to a drop in domestic and overseas demand. Producers of wood products continued to struggle, with one contact describing the current lumber market as being the "worst in 25 years." Capacity utilization rates at petroleum refineries remained well below their longer-term average. Metal fabricators faced weak demand, which was held down in part by constraints on their customers' access to financing. One bright spot was manufacturing activity for commercial aircraft makers, which resumed at high levels following the resolution of a protracted labor dispute. Demand remained strong for food manufacturers, although signs of weakening have emerged of late. Firms in manufacturing and other sectors reported further curtailments of recent and planned capital spending.

Agriculture and Resource-related Industries
Demand remained strong for agricultural producers but weakened for providers of natural resources. Although sales continued at a brisk pace for most agricultural products, significant declines in some output prices and higher financing costs put increased pressure on margins. Among oil extractors, weaker demand and lower output prices have reduced the viability of higher cost expansion projects, causing many to be delayed or shelved.

Real Estate and Construction
Activity in the District's housing markets remained weak on net, and demand for commercial real estate eroded further. Home sales were spurred in some areas by the availability of foreclosed units at rock-bottom prices, but the overall sales pace continued to be quite slow in most areas and fell considerably in some, such as parts of the Pacific Northwest. Foreclosure rates remained elevated in parts of Arizona, California, and Nevada, and they rose further in other states, notably Utah and Idaho. Demand for commercial real estate declined, with increases in office and industrial vacancy rates reported for various cities. Contacts reported limited investment in new commercial properties, due in part to constraints on credit access.

Financial Institutions
District banking contacts reported that lending activity and credit conditions weakened significantly during the survey period. Demand for commercial and industrial loans continued to fall, with the decline characterized as sharp in some areas, and new residential mortgages stayed stuck at low levels. Contacts reported that loan delinquencies and credit losses rose moderately during the survey period. Although some banks reported no reduction in their ability to provide credit in recent months, credit access remained quite restricted in general: banks and other financial institutions maintained tight standards for all types of loans, and even high-quality borrowers faced substantial impediments to acquiring funds through debt and private equity.

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Last update: December 3, 2008