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Federal Reserve Districts

Twelfth District--San Francisco

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Economic activity in the Twelfth District showed continued scattered signs of firming but appeared to be little changed on net during the reporting period of late July through the end of August. Upward price pressures remained quite modest overall, and upward wage pressures were largely absent. Retail sales in general stayed anemic, while demand for services continued to erode. District manufacturing activity remained stuck at very low levels, although conditions improved further for manufacturers of information technology products. Demand was solid for agricultural producers but remained weak for providers of natural resource products. Home sales strengthened further in most areas, but demand for commercial real estate continued to weaken. Banking contacts reported that District lending activity eased on net and credit quality continued to deteriorate.

Wages and Prices
Upward price pressures remained quite modest on net during the reporting period. Commodity prices in general were stable, although the prices of oil and selected other commodities such as steel rose. Final prices for assorted retail goods continued to be held down by extensive discounting and promotional activity, and weak demand further reduced the prices of various categories of services. About two-thirds of the contacts reported that they expect prices for the goods and services sold in their respective industries to remain largely unchanged through the remainder of 2009.

Little or no upward pressure on wages was reported. Hiring remained quite restricted, and high levels of unemployment held down wage pressures throughout the District. Contacts noted that, despite an anticipated improvement in economic conditions, they expect hiring to remain subdued for a prolonged period as companies focus on maintaining recent productivity improvements rather than expanding employment; accordingly, they expect upward wage pressures to remain muted for some time.

Retail Trade and Services
Retail sales overall remained very sluggish, although there was a substantial pickup in the sale of new autos resulting from the cash-for-clunkers program. Consumers continued to restrain their spending on large discretionary purchases and luxuries, resulting in weak demand at department stores and specialty retail outlets. Conversely, retailers who focus more on necessities, such as discount chains and grocers, saw further sales gains. In response to the implementation of the cash-for-clunkers program, sales of new automobiles rose substantially compared with the prior survey period; however, contacts cautioned that sales are likely to return to their earlier low levels at the conclusion of the program. Demand for used automobiles stayed strong, although the limited supply of suitable inventory continued to restrict sales.

Demand for services eased further since the last reporting period. Contacts in the restaurant and food services industry noted weak demand and further declines in revenues. Providers of health-care services reported a small drop in patient volumes, reversing the slight uptick in the prior period. Demand weakened further for providers of professional services such as business consulting and also for transportation services, although the pace of decline has reportedly moderated. Travel activity in the District was mixed: it fell further at major destination markets in California and Nevada, but contacts in Hawaii reported a slight increase in visitor arrivals and hotel occupancy rates from prior low levels.

District manufacturing activity generally remained weak during the reporting period of late July through the end of August. Demand weakened further for metal fabricators, causing capacity utilization to fall from existing low levels and resulting in additional layoffs. Activity at petroleum refineries continued to decline as a result of producers' efforts to reduce excess inventories. Makers of commercial aircraft and parts saw further significant declines in new and existing orders, and they reduced production activity accordingly. By contrast, conditions continued to improve for manufacturers of semiconductors and other information technology products, as reflected in rising orders and capacity utilization. Food manufacturers saw further sales gains.

Agriculture and Resource-related Industries
Demand for agricultural products stayed solid, while demand remained somewhat weak for extractors of natural resources used for energy production. Sales for most types of agricultural products continued to expand, and input costs, in particular transportation costs, stayed largely stable. Weak demand caused inventories to rise further for oil extractors, reaching levels close to earlier highs from a decade ago. Similarly, weak demand for natural gas continued to constrain extraction activity and put downward pressure on prices.

Real Estate and Construction
Housing market activity in the District remained weak but showed continued signs of improvement, while demand for commercial real estate eroded further. The pace of home sales in many areas of the District, though still at relatively low levels, continued to edge up, spurred by price declines and low mortgage rates. However, contacts in some areas, including lower-cost areas such as Idaho and Utah, noted that steep rates on nonconforming "jumbo" loans and a scarcity of lenders willing to offer them have restricted sales of higher-priced homes. Moreover, new home construction remained at very low levels throughout the District. Conditions continued to deteriorate in the commercial real estate market, with vacancy rates for office and industrial space increasing in many parts of the District and rent concessions rising in frequency. Contacts reported that limited availability of financing continued to sharply curtail construction activity and investment transactions for commercial properties.

Financial Institutions
District banking contacts reported that loan demand softened further during the reporting period. Consumer loan demand stayed weak on net, and commercial and industrial loan volumes fell further as business owners remained very cautious about their capital spending. Lending standards remained relatively restrictive for consumer and business lending, and credit quality deteriorated further as corporate and household borrowers' balance sheets continued to weaken. Venture capital financing was one bright spot, with contacts noting increased investment amounts and declines in covenant violations for existing arrangements.

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Last update: September 9, 2009