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Federal Reserve Districts

Twelfth District--San Francisco

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Economic activity in the Twelfth District appeared to post further modest growth during the reporting period of September through early October, although conditions in many sectors remained weak. Price increases for final goods and services were quite limited, and upward pressures on wages were virtually nonexistent. Demand for retail items and services continued to strengthen somewhat, but sales remained lackluster overall. Manufacturing activity in the District firmed a bit further on balance. Sales were robust for agricultural products, while demand was largely stable for energy resources. Activity in District housing markets remained sluggish, and demand for commercial real estate stayed weak. Contacts from financial institutions reported largely stable lending activity.

Wages and Prices
Upward price pressures were very limited on net during the reporting period. Commodity prices changed little in general, with the exceptions of continued increases in grain prices and rising prices for metals, particularly copper. Contacts pointed to very limited pricing power for most retail items and service categories, as final prices continued to be held down by weak demand and extensive competition.

Upward wage pressures were largely absent, although reports pointed to further increases in the costs of employee benefits, particularly health care. High unemployment and limited demand for new employees held down compensation gains in most regions and sectors. Contacts in most sectors expect that ongoing productivity gains and cost efficiencies will largely offset the need for staffing increases in the near term. However, a few contacts noted that some firms have reached the limits of productivity gains from current staff and will need to add workers as product demand improves.

Retail Trade and Services
Retail sales remained sluggish but improved somewhat on balance. Both traditional department stores and discount retail chains reported modest improvements in sales, although somewhat elevated inventories were noted; moderately priced items such as selected home and garden products reportedly saw the strongest gains. By contrast, retailers of major appliances and furniture reported a further slowdown in activity and expressed pessimism for a reversal over the remainder of the calendar year. Grocery sales were characterized as largely flat, with consumers focused on bargains, and grocers do not anticipate any change in customer buying patterns for the foreseeable future. Sales of new domestic and imported automobiles improved a bit, with dealers citing replacement of broken-down or leased vehicles as key motivating factors for purchases.

Demand for services continued to improve modestly. Sales grew for providers of technology services, spurred in part by business investments to enhance production efficiency. Contacts in the restaurant and food services industry noted continued slight gains in activity. Demand for professional, media, and entertainment services held largely steady overall. Providers of energy services reported increased deliveries to businesses and households, and activity picked up somewhat for providers of trucking services. Conditions in the District's travel and tourism sector improved further. Visitor volumes and hotel occupancy rates rose in several of the District's major markets, spurred largely by significant growth in business travel and convention activity.

District manufacturing activity expanded further on balance during the reporting period of September through early October. For manufacturers of semiconductors and other technology products, demand continued to grow, although the pace of growth slowed a bit and inventories rose slightly. Extensive order backlogs continued to keep production rates at or near capacity limits for manufacturers of commercial aircraft and parts. Demand firmed further for metal fabricators, although capacity utilization remained well below normal. Activity at petroleum refineries slowed a bit and inventories rose, as seasonal declines in domestic demand were only partly offset by increased overseas demand. Conditions in the wood products industry remained depressed.

Agriculture and Resource-related Industries
Sales of agricultural products continued at a brisk pace, and demand appeared to hold steady on net for natural resources used for energy production. Final sales and orders for most types of agricultural products continued to be robust, and input costs stayed largely stable. Unfavorable weather conditions and consequent supply restrictions for overseas producers have boosted sales for domestic producers of corn and food grains. Demand for crude oil fell slightly, largely as a result of the normal end-of-summer lull, but extraction activity for natural gas rose further.

Real Estate and Construction
Housing demand in the District appeared to be little changed from the previous reporting period, and demand for commercial real estate remained largely stable at very low levels. The pace of home sales continued to be mixed across areas but mostly unchanged on balance. In response to sluggish sales, new home construction has stayed quite subdued, although contacts reported slightly expanded activity for home repairs and remodeling. Conditions in commercial real estate markets generally remained weak, as vacancy rates stayed at very high levels in many parts of the District. Although slight declines in total space availability were reported for some areas, tenants continued to receive rent concessions and other favorable terms in many cases.

Financial Institutions
Reports from District banking contacts indicated that loan demand was largely unchanged compared with the prior reporting period. Demand for commercial and industrial loans continued to be restrained by businesses' cautious approach to capital spending and desire to deleverage. Consumer loan demand also remained weak overall, although contacts noted an uptick in demand for nonconforming mortgage loans. While lending standards stayed relatively restrictive for business and consumer lending, the reports suggested some loosening of credit standards for select groups of borrowers. Contacts also pointed to an uptick in financing for corporate acquisitions as well as further modest expansion in IPO activity.

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Last update: October 20, 2010