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

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



Economic activity in the Twelfth District expanded at a modest pace during the reporting period of October through mid-November. Price inflation for final goods and services was subdued overall, and upward wage pressures were quite limited. Sales of retail items and most business and consumer services rose further on net, and contacts noted expectations for sales growth during the holiday retail season. District manufacturing activity was uneven but appeared to expand on balance. Agricultural output and sales increased, and extraction activity rose for providers of energy resources. Housing demand continued to firm, and conditions were largely stable for commercial real estate. Contacts from financial institutions reported that overall loan demand was largely unchanged, while credit quality improved.

Wages and Prices

Upward price pressures were very limited on balance during the reporting period. Prices fell for some energy items, mainly crude oil and retail gasoline; prices rose significantly for natural gas but remained very low by historical standards. Earlier price increases for food commodities prompted moderate price increases by restaurants, in the range of 2 to 3 percent. Price movements for raw materials used in the agricultural, industrial, and construction sectors were uneven but appeared to be slightly upward on balance. Retail prices were characterized as largely flat.

Upward wage pressures were modest overall. In most sectors, limited hiring activity and extensive worker availability held down recent and planned increases in wages and overall compensation, with reported numerical increases of 2 to 3 percent in general. Only a few cases of significant upward wage pressures were noted, including for truck drivers, health-care workers, and entry-level employees in a few geographic areas where unemployment rates have declined substantially.

Retail Trade and Services

Retail sales expanded further. A pickup was noted for department store sales during the reporting period, on the heels of a slight slowdown earlier. Significant sales gains were reported for consumer technology products such as tablet computers and games, and retailers added to inventories of these products in anticipation of solid sales growth during the upcoming holiday season. Sales of new and used automobiles remained strong, running well above levels from 12 months earlier, with further gains expected at year-end.

Demand for business and consumer services expanded on net. Sales continued to grow for various technology services, as consumer demand remained high and businesses in many sectors focused their limited capital spending on information technology equipment and software. Demand for health-care services stayed somewhat weak, due to an ongoing decline in the use of discretionary medical services; however, health-care providers continued to invest in new information technology products to enhance efficiency and respond to emerging legislative requirements. Sales expanded further for restaurants. Activity in the travel sector was robust, with strong growth for visitor counts and spending in Hawaii and continued sales growth and profitability reported for U.S. airlines in recent months.


District manufacturing activity was mixed across sectors but appeared to expand on balance during the reporting period of October through mid-November. Production activity for commercial aircraft and parts has been running well above levels from last year, with further gains in production and sales expected over the next few years. Demand continued to grow at a modest pace for pharmaceutical manufacturers. For producers of wood products, capacity utilization and sales have held up in recent months and generally have been running above their levels from last year. By contrast, the slowdown continued for makers of information technology equipment, with further sales declines reported for some equipment categories. Demand for scrap metal and steel remained low by historical standards but improved a bit, largely as a result of increased demand for use in automobile manufacturing and infrastructure construction projects. Production activity fell at petroleum refineries in response to recent declines in consumer demand for gasoline.

Agriculture and Resource-related Industries

Agricultural producers saw further sales gains, and extraction activity of natural resources used for energy production continued to expand. Contacts noted that the agricultural sector appears to be immune from factors that have restrained growth in other sectors of late: production activity and sales of most crop and livestock products have been growing at a solid pace, as has investment spending on new production equipment. Extraction activity expanded on balance for petroleum and natural gas, although the number of rigs used for natural gas extraction has been falling as producers have shifted their extraction activities toward higher-valued oil formations.

Real Estate and Construction

Home demand in the District continued to strengthen, while demand for commercial real estate was largely stable. Home sales have been growing on a sustained basis in most areas, spurring incremental gains in home construction activity. Home prices also have firmed, with significant gains reported over the past 12 months in some areas, substantially reducing foreclosure pressures. Construction activity for multifamily rental projects grew further in response to rising rents and tight availability of lower-priced homes. Demand for nonresidential space was largely stable overall, and contacts noted that the amount of new commercial construction was limited, although significant construction activity continued for large infrastructure projects such as roads and bridges.

Financial Institutions

District banking contacts reported that loan demand was largely unchanged on balance. Business loan demand was characterized as weak to moderate. Firms in most sectors remain uncertain about near-term prospects for their revenues and costs; hence, they are reluctant to make new capital investments other than those that directly enhance business efficiency and pay returns within a short time frame. The reports continued to highlight ample liquidity and stiff competition among lenders to provide credit to well-qualified business loan applicants, with community banks facing increasing competition from larger national banks for small business lending. Consumer lending expanded further, primarily for automobile purchases and new or refinanced home mortgages. Contacts noted that credit quality has been showing slow but steady improvement for business and consumer loans.

SOURCE: Federal Reserve Board