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Federal Reserve Districts

Twelfth District--San Francisco

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Economic activity in the Twelfth District grew at a moderate pace during the reporting period of September through early October. Upward price pressures were mixed but remained modest overall, and upward wage pressures were limited to a narrow set of skilled occupations. Sales of retail items rose, as did demand for business and consumer services. District manufacturing activity improved modestly. Agricultural producers reported further sales gains, and demand rose a bit for providers of energy resources. Home sales and construction remained lackluster, and demand for commercial real estate stayed weak in most markets. District banking contacts indicated that overall loan demand was largely unchanged.

Wages and Prices
Overall price inflation for final goods and services was modest during the reporting period. Contacts noted additional price declines for energy inputs, particularly oil, but slight upticks in the costs of assorted raw materials. The combination of weak final demand and robust competition by firms continued to hold down final prices for a wide range of goods and services.

Contacts in most sectors reported that upward wage pressures were nearly nonexistent, held down by limited demand for new hires and high levels of unemployment. However, wage gains remained pronounced for narrow worker groups with specialized skills, particularly in information technology fields. The reports suggested that wage gains are likely to remain muted for the foreseeable future, as most businesses do not expect to engage in significant hiring over the balance of 2011, except for normal seasonal needs.

Retail Trade and Services
Retail sales expanded overall. Despite contact reports of deteriorating consumer sentiment, sales improved for both traditional department stores and discount chains alike. By contrast, sales were largely flat for grocers and retailers of major appliances, furniture, and electronics. Sales of new automobiles improved substantially, as demand growth was met by restocked inventories for some brands that had struggled with shortages resulting from the natural disaster in Japan earlier this year. In response to the surge in demand for new autos, the demand for used vehicles weakened somewhat and their prices softened. Despite recent gains, contacts expect that overall consumer spending in the final months of the year will be little changed from the same period last year.

Demand for business and consumer services was mixed but appeared to improve on balance. Energy utilities reported further increases in demand from businesses and households. Sales continued to expand for providers of technology services, although the pace of growth has slowed from reporting periods earlier in the year. Demand was largely flat for providers of professional services such as legal services and accounting and also for health care. Providers of transportation services reported slightly slower activity. Conditions in the District's travel and tourism industry were mixed: contacts in Hawaii noted a slight decline in visitor volumes, while contacts in other major markets, such as San Diego and Las Vegas, noted further improvements in visitor counts and hotel occupancy rates.

Manufacturing activity in the District showed modest gains on balance during the reporting period of September through early October. Makers of commercial aircraft and parts reported ongoing growth in new orders, which combined with an existing backlog to keep production rates near capacity. Apparel makers noted an increase in new orders, and production activity grew for food manufacturers. Manufacturers of semiconductors and other technology products reported further moderation in the pace of growth for new orders and sales, although capacity utilization rates stayed quite high. Capacity utilization rates also remained largely stable for petroleum refiners, despite increased distillate demand, as they strived to reduce elevated product inventories. Demand remained feeble for manufacturers of wood products used for construction, and this was accompanied by recent signs of weakness in the pulp and paper sector, which had reported growth earlier this year.

Agriculture and Resource-related Industries
Demand continued to expand for agricultural products, and activity overall improved somewhat for metal miners and extractors of natural resources used for energy production. Final sales and orders rose further for assorted crops and livestock products, and reports indicated little change in the cost and availability of inputs. High price levels for assorted metals continued to boost production and investment in the District's mining sector. Extraction activity for natural gas was little changed from the prior period, while overall demand for crude oil improved somewhat as a result of rising foreign demand, particularly from emerging-market economies.

Real Estate and Construction
District home demand remained quite weak, and demand for commercial real estate was largely unchanged. The pace of home sales stayed sluggish throughout the District. The large number of distressed properties kept inventories of available homes high, putting downward pressure on prices and the pace of new home construction. In response to weak home demand, however, demand for residential rentals continued to improve, spurring expanded construction of multifamily units in some areas. Demand for commercial real estate was generally weak, as reflected in elevated vacancy rates for office and industrial space in most parts of the District. Furthermore, contacts noted a renewed sense of caution on the part of some business tenants and consequent reluctance to commit to long-term leases. On the other hand, conditions continued to improve for some major District markets, with rising investor demand for well-leased office buildings further boosting property values.

Financial Institutions
District banking contacts reported that loan demand was little changed from the prior reporting period. Businesses in general remained highly cautious in regard to their capital spending plans, citing recently elevated levels of uncertainty about the direction of the economy. As a result, demand for commercial and industrial loans was largely flat, although some contacts noted that competition among lenders to extend credit to well-qualified small and medium-sized businesses continued to intensify, placing further downward pressure on rates and fees. Demand for consumer credit was characterized as stable. Lending standards remained relatively restrictive for most types of business and consumer loans.

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Last update: October 19, 2011