Bloomberg News

U.S. Federal Reserve Beige Book: San Francisco District (Text)

June 06, 2012

The following is the text of the Federal Reserve Board’s Twelfth District-- San Francisco



Economic activity in the Twelfth District continued to grow at a moderate pace during the reporting period of April through late May. Price increases for final goods and services were very modest, and upward wage pressures were quite limited overall. Sales of retail items rose, as did demand for consumer and business services. District manufacturing activity picked up further. Sales remained robust for agricultural producers, while conditions were mixed for providers of energy resources. Demand rose modestly for residential real estate and also improved a bit for commercial real estate. District banking contacts reported that overall loan demand edged up, and they noted further slight improvements in credit quality.

Wages and Prices

Price inflation remained quite limited for most final goods and services. Contacts noted price declines for energy inputs, particularly oil, and for an assortment of food items at the retail level. More generally, upward price pressures were quite modest, as suppliers of final goods and services were readily able to meet the existing modest growth in demand.

Contacts reported that upward wage pressures were quite limited overall. High unemployment and modest demand for new hires continued to hold down compensation gains for workers in most industries and occupations. However, wage and compensation gains remained substantial in various industries and regions for workers with specialized skills in the application of information technology.

Retail Trade and Services

Retail sales grew modestly on balance. Gains were reported by traditional department stores and discount chains alike, although contacts noted a slightly slower pace of growth compared with the prior reporting period. Inventories generally were at or near desired levels given the current pace of sales. Demand growth slowed for retailers of home furnishings and major appliances, resulting in mostly flat sales. Demand was largely unchanged for grocers. Sales of new automobiles rose during the reporting period, although the pace of growth has moderated from that seen in the most recent reporting periods. Demand remained strong for used vehicles and combined with tight inventories to keep prices elevated.

Demand for business and consumer services rose a bit further on balance. Activity was largely flat for professional services such as legal services and accounting, as well as for health- care services. By contrast, demand improved for transportation services such as trucking. Sales rose at a modest pace for providers of technology services, with the pace held down in part by weaker sales to European buyers; however, contacts continue to anticipate that growth will pick up in the second half of the year. Activity expanded further for radio and television broadcasters, spurred by rising demand for advertising slots. Sales activity improved further for restaurants and other food-service providers. District travel activity continued to pick up, with contacts in major markets such as Southern California, Hawaii, and Nevada highlighting ongoing improvements in visitor counts and hotel occupancy rates.


District manufacturing activity rose further during the reporting period of April through late May. New orders continued to improve for manufacturers of semiconductors and other technology products, and inventories were reported to be at appropriate levels given the prevailing pace of sales. Contacts in the pharmaceutical manufacturing sector reported robust demand. Orders grew a bit for makers of commercial aircraft and parts, driven primarily by demand for fuel-efficient aircraft, and an extensive order backlog kept production rates at very high levels. For petroleum refiners, strong global demand supported an uptick in capacity utilization rates. Demand improved slightly for steel manufacturers but remained depressed for manufacturers of wood products.

Agriculture and Resource-related Industries

Demand for agricultural products remained robust, while extraction activity for energy resources continued to be uneven. Orders and sales expanded further for most crop and livestock products, spurred in part by strong growth in overseas exports. However, contacts noted that the costs of energy inputs remained quite high, and they cited renewed concerns that drought in some areas may undermine growing conditions in coming months. For energy resources, elevated price levels continued to support a pickup in oil extraction activity. By contrast, price declines for natural gas resulted in a further reduction of extraction activity, primarily at sites for which the extracted amount of valuable liquid byproducts is low.

Real Estate and Construction

District home demand improved a bit further overall, and demand for commercial real estate picked up slightly on balance. Sales of new and existing homes ticked up in many areas, although the pace remained well below its historical average. The pickup was supported in part by slight improvements in financing availability, which has been an important factor holding down sales in the recent past. Faster sales reduced the inventory of available homes, which in turn caused home construction activity to rise slightly in some areas. By contrast, home prices remained largely flat. On the commercial side, vacancy rates for office and industrial space stayed elevated throughout many parts of the District. However, contacts noted widening signs of improved demand. The San Francisco Bay Area and Seattle markets continued to benefit from growth in the technology sector, which is prompting rapid absorption of commercial space and encouraging new construction. Contacts noted improved demand for office and retail space in other areas as well, such as Boise, Idaho.

Financial Institutions

Reports from District banking contacts indicated that loan demand showed further slight gains overall. Although businesses remained very cautious in their capital spending plans, demand edged up a bit further for new commercial and industrial loans. Furthermore, reports from most sectors suggested that capital spending is likely to increase modestly in the second half of the year compared with the first. Demand for consumer credit appeared largely unchanged. Further improvement in overall credit quality was noted, and continued fierce competition to extend credit to well-qualified small and medium-sized businesses has kept a lid on loan rates and fees. Overall, however, lending standards remained somewhat restrictive for many types of business and consumer loans.

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