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Federal Reserve Districts

Twelfth District--San Francisco

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Economic activity in the Twelfth District appeared to expand modestly during the reporting period of mid-July through the end of August. Upward pressures on prices and wages were quite limited. Sales of retail items and services were mixed but grew on balance. District manufacturing activity firmed a bit further, with continued strength evident for manufacturers of information technology products. Agricultural producers reported robust sales, and demand strengthened further for energy resources. Activity in District housing markets continued to slide, while demand for commercial real estate remained weak. Contacts from financial institutions reported slight declines in lending activity but further improvements in credit quality.

Wages and Prices
Upward price pressures remained very limited on net during the reporting period. Commodity prices in general were largely stable, with the exception of rising grain prices and pronounced short-term volatility in oil prices. Excess capacity and extensive competition continued to hold down final prices for most retail items and service categories. The primary exception was health care, for which prices continued to rise. Looking forward, contacts in general anticipate that prices for their products will change little over the balance of 2010.

Upward wage pressures were largely absent, as high unemployment and limited demand for new employees held down compensation gains in most regions and sectors. Contacts continued to report significant increases in the costs of employee benefits, most notably for health insurance. Reports indicated that most businesses remain cautious in their approach to hiring and continue to rely on improved productivity rather than increased employment as a means to expand output.

Retail Trade and Services
Retail sales were mixed. Traditional department stores and discount retail chains alike reported further sales increases for small household items, with generally balanced inventories noted. By contrast, sellers of major appliances and furniture reported a slowdown and "difficult" conditions in July and August. Grocers reported largely flat sales and noted an ongoing shift towards less-expensive generic labels. Sales of new domestic and imported automobiles improved near the beginning of the reporting period but slowed subsequently. Used vehicle sales improved marginally, while dealers faced a limited supply that kept inventories tight.

Demand for services improved modestly on balance but remained lackluster overall. Demand for professional, media, and entertainment services was mixed across sectors but appeared to be largely stable at low levels on net. Providers of energy services reported stronger demand for industrial use, with the exception of wood products. Contacts from around the District noted increased business travel and tourism activity, as reflected in higher visitor volumes, hotel occupancy rates, and airline passenger miles, although visitor spending remained weak. Providers of health-care services reported that demand slipped somewhat, which they attributed in part to rising postponements or cancellations of elective procedures and routine tests by individuals who lack health insurance.

District manufacturing activity generally continued to grow during the reporting period of mid-July through the end of August. Demand strengthened further for manufacturers of semiconductors and other technology products, with high levels of capacity utilization and balanced inventories noted. While new orders remained limited for makers of commercial aircraft and parts, extensive order backlogs kept production rates near capacity limits. Activity at petroleum refineries rose in response to increased demand, although inventories remained at elevated levels. Food manufacturers reported further growth in sales. By contrast, demand for wood products deteriorated, reportedly as a result of a slowdown in new home construction as well as residential repair and remodeling activity.

Agriculture and Resource-related Industries
Demand remained strong for agricultural products and improved further for natural resources used for energy production. Orders and final sales continued to be robust for assorted crops and livestock products. Contacts generally noted stable input costs and supply conditions, although unseasonably cool weather in parts of California compressed the growing seasons for some crops. Oil extraction activity expanded further as a result of recent increases in global demand, and strong demand for natural gas caused the number of rigs in service to rise.

Real Estate and Construction
Housing demand in the District weakened somewhat from the previous reporting period, while demand for commercial real estate remained largely stable at depressed levels. The pace of home sales continued to be mixed across areas but fell on balance, and contacts noted that the slowdown in home sales has placed renewed downward pressure on new home construction. Despite sluggish sales activity, home prices edged up further in some parts of the District. Demand for commercial real estate remained at very low levels, as reflected in elevated vacancy rates and subdued leasing activity for office and industrial space in many parts of the District. However, one contact reported further increases in the sales prices of selected commercial properties in some areas.

Financial Institutions
District banking contacts reported that loan demand slipped somewhat. Commercial and industrial loan volumes waned a bit, reportedly restrained by businesses' cautious attitudes towards capital spending stemming from their uncertainty about the future economic environment. While a majority of respondents across all industries indicated that they anticipate no change in the pace of economic growth in their respective industry or area in the second half of the year compared with the first, most of those who do expect a change foresee a slowdown as opposed to a pickup. Consumer loan demand also remained weak overall. By contrast, venture capital financing continued to be a bright spot, with contacts noting increased levels of funding, as well has heightened IPO activity. Although contacts noted slight improvements in overall credit quality, lending standards stayed relatively restrictive for business and consumer lending.

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Last update: September 8, 2010