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Federal Reserve Districts

Twelfth District--San Francisco

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Economic activity in the Twelfth District appeared to increase modestly during the reporting period of early January through late February. Upward pressures on prices and wages remained quite limited. Sales of retail items and services generally stayed at low levels, but both showed some improvement. Manufacturing activity was mixed but appeared to pick up further on balance. Sales continued to expand for agricultural producers, while demand for energy resources fell. Home demand appeared to be little changed from the previous period, but demand for commercial real estate continued to slide. Contacts from financial institutions reported that loan demand was largely unchanged and credit standards remained tight.

Wages and Prices
Upward price pressures were very modest on net during the reporting period. Commodity prices were stable or down in general, with declines noted for natural gas, copper, and aluminum. Weak demand continued to hold down prices for various services and most retail items, with extensive discounting reported for the latter. Nearly three-fourths of respondents anticipate that prices for the goods and services sold in their respective industries will remain largely stable during 2010; of the remainder, the number expecting declines was slightly higher than the number expecting increases.

Contacts in most sectors characterized wages as essentially flat, although some businesses reported significant increases in the costs of employee benefits, especially for health insurance. Upward wage pressures were limited by high unemployment and restricted hiring in most sectors and regions. An overwhelming majority of respondents expect no change in their firm's employment counts for at least the first half of the year, and they expect limited hiring to hold down wage pressures going forward.

Retail Trade and Services
Retail sales continued to firm but remained sluggish on net. Both discount chains and traditional department stores reported sales increases, with scattered reports pointing to a slight pickup in consumers' appetites for discretionary spending. Sales were characterized as flat for grocers and retailers of furniture, appliances, and electronic items. New automobile sales slipped somewhat, although the reports suggested that consumer interest rose in recent weeks, perhaps signaling improved sales in the near term. For used automobiles, reduced availability held back sales somewhat and caused prices to rise. Unit sales of gasoline were running slightly below their levels from 12 months earlier, despite modest price declines in recent weeks.

Demand for services continued to be weak overall but showed signs of improvement since the last reporting period. Sales remained sluggish for providers of professional and media services, although scattered increases in demand were noted for some categories. Similarly, restaurants and other food-service firms stated that they are slowly seeing signs of recovery in demand. Providers of health-care services reported an increase in patient volumes. Conditions remained challenging for businesses in the tourism and leisure sector, although further signs of improvement were reported: contacts in Southern California and Seattle noted that hotel occupancy rates appear to have stabilized, while contacts in Hawaii and Las Vegas noted ongoing increases in visitor volumes.

District manufacturing activity remained mixed but picked up further on balance during the reporting period of early January through late February. Demand strengthened further for manufacturers of semiconductors, with high levels of capacity utilization and balanced inventories noted. New orders continued to be very limited for makers of commercial aircraft and parts, but the existing order backlog helped keep production activity at or near the prior pace. Demand and capacity utilization for metal fabricators remained at exceptionally low levels. Manufacturers of wood products also continued to face very weak demand, although a slight pickup was noted. Activity at petroleum refineries remained well below the five-year average levels, prompting refinery closures or sales in some cases.

Agriculture and Resource-related Industries
Sales grew further for agricultural products, but demand declined a bit for extractors of natural resources used for energy production. Sales rose for assorted crops and livestock products, and reports indicated that inputs were readily available. Contacts noted that favorable weather, including substantial moisture, have enhanced production conditions for crops and livestock. Oil extraction activity and capital spending in that industry continued to be held down by weak global demand, while demand for natural gas slid a bit as a result of unseasonably warm weather in some parts of the District.

Real Estate and Construction
Demand for housing appeared to be little changed on net, while demand for commercial real estate slid further. The pace of home sales was mixed across areas but appeared to be largely unchanged after adjusting for normal seasonal variation. Home prices reportedly rose a bit further in some areas of the District. However, the number of available homes for sale remained elevated, which substantially offset builders' incentives to increase the pace of new home construction. Demand slid further for commercial real estate, and tenants continued to push for and often achieve rent concessions and other favorable terms through renegotiation of existing leases. However, one contact noted an increase in leasing activity in some segments of the major markets in the District, as well as slightly improved availability of financing for new commercial development and investment transactions.

Financial Institutions
Reports from District banking contacts indicated that loan demand was largely unchanged from the prior reporting period. Consumer loan demand remained weak on net, and commercial and industrial loan volumes continued at low levels, as business owners remained quite cautious about their capital spending and hiring plans. Lending standards continued to be relatively restrictive for most types of consumer and business loans, and contacts reported further loan losses. Venture capital financing remained a bright spot, with contacts noting further improvements in levels of investment funds and IPO activity.

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Last update: March 3, 2010