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.

Twelfth District economic activity expanded at a modest pace during the reporting period of January through late-February. Price inflation was limited overall, and upward wage pressures were quite modest. Sales of retail items were up on balance, and most business and consumer services gained. District manufacturing activity ticked up. Production activity and sales were strong for agricultural producers. Housing demand trended up further, and commercial real estate activity expanded. Contacts from financial institutions reported small increases in overall loan demand and slight improvements in credit availability.

Wages and Prices

Price increases were limited for most items. Modest upward price pressure was reported for petroleum-related products such as gasoline, fertilizer, and plastics, and some technology products containing precious metal or rare earth components. Reports indicated that prices of some construction materials, including wood products, wallboard, drywall, and steel rebar edged up further, while roofing, cement, and aluminum prices dropped back slightly. Retail grocers reported relatively stable pricing overall, but weather-related factors boosted fresh produce prices in some regions. Hotel room rates increased in Las Vegas and Hawaii. Prices for professional services, such as legal and financial, were stable.

Contacts reported that wage gains were quite modest for most types of workers. Prolonged weakness in labor market conditions has restrained hiring plans, and ready worker availability in most sectors and regions has held down increases in wages and compensation. Some upward pressure was reported for workers in sectors and geographic areas with relatively low unemployment rates, including hospitality workers in popular tourist destinations. A shortage of trained engineers continues to prompt vigorous employer competition and significant compensation gains for this group across a number of industries. In a few areas experiencing large increases in construction activity, wages of construction labor have risen noticeably.

Retail Trade and Services

Retail sales grew modestly on balance. The recent pace of sales and the near-term sales outlook were reported as fragile by retailers selling to consumers at the lower end of the income distribution. New automobile sales remained solid, driven by demand to replace older vehicles and low financing rates. Sales remained somewhat soft for traditional retail grocers, who experienced intensifying competition from discount and online retailers. Demand for higher-end clothing has been stable. Contacts also reported expansion in the user base for Internet and digital media products through increased sales of devices and enhanced features on a number of existing platforms.

Demand for most business and consumer services gained. Contacts pointed to solid sales of various technology services and greater demand for financial and accounting services. Food service providers reported strong sales on net. Activity in the District’s tourism and travel sector advanced, with solid growth of visitor counts and occupancy rates reported in Hawaii; however, more modest gains were reported in Las Vegas and Southern California. Current demand for health-care services remained relatively weak, but contacts projected rising demand as additional components of the Affordable Care Act are implemented.


District manufacturing activity appeared to tick up during the reporting period of January through late-February. Production activity for commercial aircraft and parts expanded, although contacts projected weaker demand for defense aircraft. Longer-term bookings for electronic components appeared to increase. Pharmaceutical goods producers experienced modest gains. Contacts indicated high levels of demand for a clean alternative to diesel fuel that is under development. Wood product manufacturers reported that demand grew further, fueled in large part by rebounds in residential construction activity. Demand for steel products used primarily in infrastructure and nonresidential construction projects grew somewhat. While overall steel capacity utilization remained at a historically low level, capacity utilization was stronger in the automotive steel products subsector.

Agriculture and Resource-related Industries

Production activity and sales were strong for agricultural producers, and extraction activity of natural resources used for energy production expanded on net. Demand for most crop and livestock products grew further, and high grain prices contributed to elevated land prices. Agricultural producers faced higher petroleum-based fuel costs but lower natural gas costs. Natural gas inventories declined a bit. In some slower-growing regions, demand for new gas and electric hookups remains tepid. In parts of the District, warmer-than-average weather conditions led to reductions in overall energy usage. Raw materials were adequately available, although water availability beyond 2013 was a concern in some regions due to a dry winter.

Real Estate and Construction

Demand for housing strengthened, and commercial real estate activity expanded, driven by pockets of strength in several locales. Home sales climbed further in most regional markets, and continuing low inventory levels supported stable or increasing prices. Construction of multifamily residential projects continued to expand. Commercial real estate development and leasing activity increased, particularly in the San Francisco Bay Area and Seattle markets, fueled by sustained growth in the technology sector. Commercial rental rates increased in various parts of the District.

Financial Institutions

Contacts from financial institutions reported that loan demand was up somewhat, and overall credit availability has either improved or remained unchanged from the last quarter of 2012. Contacts expect loan demand to increase more rapidly after federal spending uncertainty is alleviated. 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 for small business and auto lending. Contacts reported increases in privately held technology companies poised for public offerings; despite the positive outlook, recent initial public offering, venture capital, and private equity activity was relatively slow in the District’s Internet and digital media subsectors. Reports indicated that credit quality for both business and consumer loans has continued to improve slowly.

SOURCE: Federal Reserve Board

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