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.


Summary Twelfth District economic activity expanded at a modest pace during the reporting period of mid-November through December. Upward price pressures were limited overall, and upward wage pressures were quite modest. Sales of retail items this holiday season were similar to or up slightly from last year, and most business and consumer services gained. District manufacturing activity was mixed across sectors but generally appeared to move up. Demand for agricultural products increased, and extraction activity rose for providers of energy resources. Housing demand trended up further, and conditions were largely stable for commercial real estate. Contacts from financial institutions reported that loan demand was unchanged or up somewhat, and credit quality improved.

Wages and Prices

Upward price pressures were limited on balance during the reporting period. Price movements for energy items were mixed: retail gasoline prices fell, and electricity prices rose in some areas. Prices for some intermediate materials used in the construction sector, such as drywall and steel rebar, ticked up, while log and pulp prices remained flat. Prices of grapes and nuts increased, and higher prices for grains and corn due to the drought earlier in the year boosted prices of grocery dairy and meat items. A restaurant chain reported menu price increases in the 2 to 3 percent range.

Contacts in most sectors reported that upward wage pressures were modest. Limited hiring plans and ready worker availability in most sectors and regions have held down increases in wages and compensation. However, wages increased for some information technology workers who possess advanced skills and are in low supply. The market for technically trained workers for the petroleum industry remains tight. A few contacts expect wage hikes in 2013 in response to the expiration of multiyear, company-wide salary freezes. Health-care benefit cost increases are expected to accelerate and outpace wage increases.

Retail Trade and Services

Retail sales were on a par with or up slightly from last year’s holiday season, but generally did not meet vendors’ expectations. Online retailers experienced more robust sales growth than traditional brick-and-mortar retailers. Inventories generally were at or near desired levels given the pace of sales, although some retailers reported having an excess of winter apparel due to relatively mild weather conditions, while others ran short on certain consumer technology products. Contacts in the information technology sector indicated strong sales of newer hardware and games, but relatively weak sales of established goods as well as some Internet and digital media products. Both sales and margins were soft for grocers. New automobile sales remained solid, running well above levels from 12 months earlier, with year-end gains expected to be sizeable.

Demand for most business and consumer services rose. Contacts pointed to solid sales of various technology services, due mostly to typical year-end business spending increases. Revenues continued to expand for food service providers. Tourism and travel activity in the District was robust, with strong growth of visitor counts and spending reported in both Hawaii and Southern California. However, demand for health-care services remained relatively weak, with some reports of consumers continuing to opt out of elective procedures and health-care providers having excess capacity.


District manufacturing activity was mixed across sectors but expanded overall during the reporting period of mid-November through December. With healthy demand for fuel efficient planes and a sustained backlog of orders, production activity for commercial aircraft and parts has been running well above levels from last year. Demand continued to grow at a modest pace for pharmaceutical and wood product manufacturers. By contrast, capacity utilization remained relatively low for manufacturers of technology equipment, and defense manufacturers have been trimming payrolls due to expected federal spending reductions. While demand for scrap metal remained somewhat weak by historical standards, that for steel products used in automotive manufacturing and in infrastructure and nonresidential construction improved. Contacts indicated that production activity picked up at petroleum refineries.

Agriculture and Resource-related Industries

Agricultural output gained further, and extraction activity of natural resources used for energy production continued to expand. Demand for most crop and livestock products continued to advance and was met in part through more intensive use of capital equipment. Extraction activity expanded on balance for petroleum and natural gas, and natural gas inventories remained at historically high levels.

Real Estate and Construction

Housing demand in the District strengthened further, while demand for commercial real estate was largely stable. Both prices and sales transactions of homes climbed in most areas, stimulating continued growth in home construction activity. In some regional markets, activity ratcheted up for higher-priced homes. Construction activity for multifamily residential projects grew further, in response to rising rents and tight availability of lower-priced homes. Demand for nonresidential space was largely stable. However, contacts reported that in select geographic areas of the District, substantial growth of technology firms has boosted demand for office space.

Financial Institutions

Contacts from financial institutions reported that loan demand was unchanged or up somewhat. Business loan demand was characterized as moderate. Banking contacts continued to highlight ample liquidity and generally 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. Although owner-occupied commercial real estate financing is readily available, banks in most regions remain reluctant to lend to real estate investors outside of the multifamily residential sector. Contacts noted a slight slowdown in IPO, venture capital, and private equity activity in the District’s technology, Internet, and digital media subsectors. Consumer lending expanded further, primarily for automobile purchases and new or refinanced home mortgages. Reports indicated that credit quality for both business and consumer loans has continued to improve, albeit at a slow pace.

SOURCE: Federal Reserve Board

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