The following is the text of the Federal Reserve Board’s Twelfth District -- San Francisco:
Economic activity in the Twelfth District continued to edge up during the reporting period of mid-October through mid-November. Despite rising prices for selected commodities, price increases for final goods and services remained quite limited, and upward wage pressures were largely absent. Sales of retail items and services rose a bit further. Manufacturing activity in the District continued to expand on net. Sales of agricultural products were robust, and demand strengthened for providers of energy resources. Housing demand stayed subdued, and demand for commercial real estate remained weak but showed signs of life in a few areas. Financial institutions reported that lending activity was largely unchanged.
Wages and Prices
Price inflation was limited for most items. Contacts noted price increases for an assortment of raw materials, such as oil, wheat, and aluminum, and for selected products sourced from China, such as apparel. However, final prices for most retail items and service categories continued to be restrained by weak demand and widespread competition.
Upward wage pressures were virtually nonexistent, held down by minimal demand for new employees and high unemployment in most parts of the District. However, contacts continued to point to significant increases in employee benefit costs, particularly for health care. Hiring plans for permanent employees remained quite limited in most sectors, although a few reports pointed to expectations for a larger surge of temporary holiday hires than in the past two years.
Trade and Services Retail sales rose further on balance but remained lackluster overall. Modest improvements in sales were reported for traditional department stores as well as discount chains, with the strongest gains again noted for moderately priced home and garden products. Sales were characterized as flat to down for grocers and for retailers of furniture and major appliances. Contacts generally anticipate that holiday season retail sales will exceed their levels from last year, with expected nominal gains ranging from 2 to 3 percent up to 5 to 7 percent. Reports on holiday inventories were mixed, with some contacts reporting continued lean inventories and others noting slightly elevated levels. New domestic and imported automobile sales improved further, spurred largely by rising demand for light trucks and vans. Sales of used vehicles were strong, but contacts noted that supply remained tight. Retail contacts reported that capital spending was quite limited and focused largely on labor-saving technologies.
Demand for services firmed further. Sales expanded for providers of technology services, prompted in part by a focus on efficiency-enhancing software investments in most sectors of the economy. Demand for professional services, such as legal and accounting, held largely stable. Providers of energy services reported further demand growth from households and businesses. Travel activity improved further in much of the District, spurred by growth in business travel as well as tourism. Visitor volumes and hotel occupancy rates showed solid gains in Hawaii but were flat to down in San Diego.
District manufacturing activity posted further gains during the reporting period of mid-October through mid-November. For makers of commercial aircraft and parts, growth in new orders for some aircraft combined with an extensive backlog to keep production rates at or near capacity. Demand grew further for manufacturers of semiconductors and other technology products, with reports highlighting rising sales, high levels of capacity utilization, and plans for expanded capital spending by some companies in the near term. Demand continued to tick up for metal fabricators, although production remained well below normal. Despite modest improvements in demand, elevated inventories caused petroleum refiners to further reduce their production activity. Sales remained anemic for manufacturers of wood products.
Agriculture and Resource-related
Industries Demand was robust for agricultural producers and improved on net for natural resources used for energy production. Final sales and orders rose for assorted crops and livestock products, and, other than price increases for livestock feed, reports indicated little change in input costs. Reductions in overseas yields due to earlier unfavorable weather conditions combined with the lower value of the U.S. dollar to boost sales for domestic producers of corn, wheat, and other food grains. Oil extraction activity rose somewhat, as robust demand growth from emerging markets along with modest improvements in domestic demand pushed up the price of oil. Extraction activity for natural gas was largely steady despite an ongoing decline in its price.
Real Estate and Construction
Activity in residential and nonresidential real estate markets generally remained unchanged at very low levels. The pace of home sales was mixed across areas of the District but appeared stable to down slightly on balance, despite improved affordability arising from low mortgage rates and past price declines. New home construction remained at exceptionally low levels, as sluggish sales and continued high rates of foreclosure caused the availability of new and existing homes to remain elevated. Demand remained weak overall in commercial real estate markets, and tenants in some areas continued to receive rent reductions and other concessions. However, further increases in leasing activity were noted for some major markets in the District, such as for technology companies in San Francisco, along with rising market values and improved availability of financing for investment transactions.
District banking contacts reported that loan demand was largely unchanged on balance compared with the previous reporting period. Demand for commercial and industrial loans inched up in some areas but remained restrained by businesses’ cautious approach to capital spending. On the consumer side, loan demand appeared to weaken slightly, which contacts attributed in part to households’ desire to deleverage. Lending standards remained relatively restrictive for business and consumer lending, and a few contacts pointed to ongoing struggles with credit quality for some banks.