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Federal Reserve Districts

Twelfth District--San Francisco

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Economic activity in the Twelfth District continued to improve modestly during the reporting period of late February into early April. Upward price pressures were quite limited, and upward wage pressures were largely absent. Sales of retail items and services remained somewhat sluggish, but both continued to show signs of improved demand. District manufacturing activity firmed a bit further, with improvement noted even in the sectors that have been among the most troubled, such as metal fabrication and wood products. Sales continued to expand for agricultural products, while demand for energy resources was mixed. Housing demand appeared to be little changed from the previous period, but conditions in commercial real estate eroded a bit further on net. Contacts from financial institutions reported largely stable lending activity and further declines in credit quality.

Wages and Prices
Upward price pressures were limited on net during the reporting period. The prices of oil and selected industrial commodities such as steel rose. Contacts also reported price increases for transportation services, notably for transpacific shipping. More generally, however, contacts in various sectors noted that final prices for a wide variety of retail items and services continued to be held down by weak demand.

Upward wage pressures remained largely nonexistent, although businesses continued to report significant increases in the costs of employee benefits, such as health insurance and pensions. High levels of unemployment throughout the District kept wage pressures to a minimum, and contacts noted continuing work furloughs and hiring freezes in some sectors. Rising reliance on temporary workers in some sectors put additional downward pressure on wages for permanent employees.

Retail Trade and Services
Sales of retail items continued to improve but remained somewhat sluggish on net. Discount chains and traditional department stores reported further sales gains, and although consumers continued to focus their purchases on necessities, a few contacts pointed to increases in discretionary spending. Retailers of furniture, appliances, and electronic items noted improved sales. Demand remained strong for grocers, although contacts reported disruptions in supplies of fresh produce caused by the earthquake in Chile. Sales of new automobiles firmed somewhat as dealers stepped up their promotional activities. Sales of used automobiles rose strongly, but contacts noted that limited supply and rising prices may restrain sales going forward. Contacts in general expect consumer spending to strengthen further in the second quarter of 2010.

Demand for services remained lackluster overall but showed further signs of improvement on balance. Contacts in the restaurant and food services industry noted modest increases in demand. For providers of professional and media services, sales were largely stable at low levels, although they rose slightly for some categories. Energy utilities reported increased demand from households and from businesses in selected industries, notably large retail establishments and firms in the technology, health services, and lodging sectors. Conditions improved a bit further in the tourism and leisure sector: contacts in the Southern California and Seattle markets noted recent increases in hotel occupancy rates, while contacts in Hawaii and Las Vegas saw additional increases in visitor volumes.

District manufacturing activity continued to improve during the reporting period of late February into early April. Demand strengthened further for manufacturers of semiconductors and other technology products, with reports pointing to rising sales and high levels of capacity utilization. New orders remained limited for makers of commercial aircraft and parts, but existing order backlogs generally held production rates at or near capacity. Demand improved modestly for struggling companies in the metal fabrication and wood products sectors, although capacity utilization remained at extremely low levels. Activity at petroleum refineries remained well below the five-year average levels, as producers worked down excess inventories arising from weak demand for gasoline.

Agriculture and Resource-related Industries
Demand remained strong for agricultural producers but was mixed for providers of natural resources used for energy production. Sales rose further for assorted crops and livestock products. Agricultural contacts indicated no changes in the availability of key inputs, and favorable weather in many parts of the District continued to enhance production conditions for a range of agricultural products. Oil extraction activity remained at relatively low levels but rose somewhat during the reporting period in response to modest increases in global demand, while demand for natural gas fell as a result of warmer weather but otherwise showed scattered signs of firming.

Real Estate and Construction
Housing demand in the District appeared to be largely stable on net, while demand for commercial real estate continued to slide. The pace of home sales remained mixed across areas but appeared largely stable overall, while home prices edged up further in some parts of the District. However, contacts noted that continued limitations on the availability of nonconforming "jumbo" loans have restrained sales of higher-priced homes in some areas. Conditions deteriorated further in commercial real estate markets, as vacancy rates for office and industrial space rose in many parts of the District. However, one contact reported continued improvements in leasing activity for some market segments in parts of the District, along with increased availability of financing for commercial real estate transactions. Regarding near-term expectations, contacts in general anticipate that demand for housing in the District will improve modestly in the second quarter of 2010, while a majority expects no improvement in demand for commercial real estate in the second quarter.

Financial Institutions
District banking contacts reported that loan demand was largely stable or up slightly compared with previous reporting periods. Consumer loan demand remained weak overall, and commercial and industrial loan volumes continued to be restrained by businesses' cautious attitudes towards capital spending. However, scattered reports indicated a small pickup in commercial and industrial loan demand stemming from selected businesses that are planning to replace worn equipment and rebuild inventories. Lending standards continued to be relatively restrictive for consumer and business lending, and banks reported additional loan losses. Further modest gains in levels of venture capital funding were noted.

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Last update: April 14, 2010