Bloomberg News

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

July 18, 2012

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



Twelfth District economic activity expanded at a modest pace during the reporting period of June through the beginning of July. Upward price pressures eased somewhat and remained quite contained overall, and upward wage pressures were limited. Sales of retail items rose a bit, and demand grew for most business and consumer services. District manufacturing activity increased slightly on balance. Demand continued to expand for agricultural producers, while activity was largely unchanged for providers of energy resources. Sales and construction activity edged up in District housing markets, and demand strengthened slightly for commercial real estate. Contacts from financial institutions reported a small increase in overall loan demand and slight improvements in credit quality and availability.

Wages and Prices

Upward price pressures were very modest during the reporting period. Price declines were noted for selected raw materials and energy inputs, especially gasoline. The declines in selected input costs combined with robust competition among firms in most sectors to hold down final prices for a wide range of retail goods and services. Looking ahead, most contacts expect prices for their products to remain largely unchanged through the balance of the year.

Upward wage pressures were limited to a few worker groups, although some contacts pointed to more general increases in the costs of pension plans and other employee benefits. Wage gains continued to be held down by high levels of unemployment and tepid demand for new workers. The most pronounced gains were reported for workers with specialized skills in the application of information technologies, along with selected narrow groups of skilled manufacturing workers.

Retail Trade and Services

Retail sales expanded a bit further overall. Modest sales gains were reported for discount chains as well as traditional department stores, and inventories generally were at or near desired levels given the pace of sales. However, some contacts reported growing concern about a softening of demand in the high-end segment of the market. Demand remained largely flat for retailers of home furnishings and major appliances, as declines in television sales offset increases for flooring and appliances. Similarly, demand stayed largely stable for grocers as consumers remained focused on necessities. The sales pace for new automobiles stayed high, bolstered in part by pent-up demand for Japanese brands whose inventories have returned to normal after being constrained by last year’s natural disaster in that country.

Demand for most business and consumer services grew further. Activity continued to expand at a solid pace for transportation services such as trucking, although contacts noted that the pace of growth has slowed somewhat in recent months. Sales grew modestly for providers of technology services, as continued weakness in demand from Europe partly offset growth elsewhere. Advertising revenues rose for radio and television broadcasters, with additional gains expected in the second half of the year. By contrast, providers of professional services such as legal and accounting reported that activity was flat. Demand picked up a bit for restaurants and other food-service providers and continued to trend up in the travel and tourism industry: contacts in Hawaii and Southern California reported further gains in visitor volumes and hotel occupancy rates and decreased reliance on price discounting.


District manufacturing activity rose a bit further on balance during the reporting period of June through the beginning of July. Manufacturers of semiconductors and other technology products noted continued high rates of capacity utilization and sales but also some emerging softness in demand. For makers of commercial aircraft and parts, an extensive order backlog and additional new orders kept production rates near capacity. Demand for steel was mostly stable at somewhat low levels, and activity weakened a bit for processed scrap metal as a result of a decline in overseas demand. Conditions remained robust in the pharmaceutical manufacturing sector. For petroleum refiners, capacity utilization rates were largely stable, as growing export sales offset subdued domestic demand.

Agriculture and Resource-related Industries

Demand for agricultural products expanded further, while extraction activity for energy resources was mostly unchanged. Final sales and orders grew for many crop and livestock products. This was stimulated in part by continued growth in overseas exports, although the reports suggested that this source of growth is on the wane. Contacts noted modest declines for input costs, particularly for energy and other petroleum- based products. For energy resources, contacts reported little change in extraction activity for oil and natural gas.

Real Estate and Construction

Home demand in the District improved modestly overall, and demand for commercial real estate ticked up on net. The sales pace for new and existing homes grew a bit further in many areas, although it stayed well below its historical average. Improvements in the pace of sales helped to reduce the inventory of available homes, prompting additional modest expansion of home construction activity. Similarly, strong demand for rental space spurred further increases in construction of multifamily units. Looking ahead, most contacts expect home sales and prices to improve a bit further during the second half of the year. Demand for commercial real estate inched up, as reflected in slight declines in office and industrial vacancy rates in some parts of the District. Growth in the technology sector continued to support improving demand for nonresidential real estate in the San Francisco Bay Area and Seattle markets, although the pace of improvement has slowed of late, with contacts noting a recent decline in rental inquiries for vacant properties.

Financial Institutions

District banking contacts reported that loan demand grew a bit during the reporting period. Although most businesses remained highly cautious in their capital spending plans and attitudes toward debt financing, the volume of new commercial and industrial loans expanded further. Demand for consumer credit grew on net, especially for auto loans. Reports continued to indicate stiff competition among lenders to provide credit to well-qualified small and medium-sized businesses, placing downward pressure on rates and fees. Contacts also noted additional improvements in overall credit quality and availability, although lending standards remained somewhat restrictive for most business and consumer loans.

Steve Ballmer, Power Forward
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