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-SAN FRANCISCO
Economic activity in the Twelfth District continued to grow at a moderate pace during the reporting period of January through mid-February. Price increases for final goods and services were limited, and upward wage pressures were minimal. Sales of retail items rose on balance, and demand improved modestly for business and consumer services. District manufacturing was mixed but appeared to expand overall. Demand grew further for agricultural producers but was uneven for providers of energy resources. Activity in District housing markets remained sluggish, and demand for nonresidential real estate stayed weak overall. Financial institutions reported a small increase in overall loan demand.
Wages and Prices
Upward price pressures remained very limited during the reporting period. While price increases were reported for some commodities, including oil and assorted construction materials such as cement and wallboard, declines were noted for others, such as natural gas. Price increases for most goods and services continued to be restrained by weak final demand and stiff competition among businesses.
Upward wage pressures were quite modest, as high levels of unemployment and limited demand for new workers kept a lid on compensation gains. However, contacts continued to point to notable increases in the costs of employee benefits, particularly in regard to defined benefit pension plans, although they reported slight easing in upward pressures on health benefit costs. Consistent with prior periods, upward wage pressures remained pronounced for workers with specialized skills in the application of information technology in assorted sectors.
Retail Trade and Services
Retail sales continued to expand. Modest improvements in sales were reported for general merchandise such as apparel and smaller household items, with stronger gains noted for traditional department stores than for discount chains. Demand also improved modestly for retailers of major appliances and furniture, but it remained lackluster for electronics. Sales held relatively stable for grocers, although upscale chains saw gains. For retailers of pet products, demand continued to show robust growth.
Demand for business and consumer services rose a bit on net. Sales grew further for providers of technology services to businesses and consumers. Similarly, demand for professional services such as legal services and accounting ticked up on balance. For providers of health-care services, demand was largely stable, with declines in inpatient admissions and surgeries offset by higher emergency room visits. Sales activity was reported to be largely unchanged for restaurants and other food-service providers. Conditions in the District’s travel and tourism industry continued to strengthen, reflecting growth in both the business and tourism segments of the market.
Manufacturing activity in the District was mixed but appeared to expand further during the reporting period of January through mid-February. Manufacturers of semiconductors and other technology products reported moderate sales gains; reports of ongoing investments in information technology equipment by firms in most sectors suggest that demand growth is likely to continue for these manufacturers. For makers of commercial aircraft and parts, strong demand for narrow-body aircraft along with an extensive order backlog kept production rates near capacity. Activity was essentially flat for metal fabricators, and slack demand combined with a diminishing backlog have raised concerns that production activity may decline going forward. Capacity utilization rates for petroleum refiners held largely stable as robust global demand for distillate products, especially from Latin America, continued to offset weak domestic demand for gasoline. Output and sales of wood products remained extremely weak.
Agriculture and Resource-related Industries
Demand continued to improve for agricultural products and mined metals, but it was mixed for natural resources used for energy production. Orders and final sales grew further for most crops and livestock products, with little or no change indicated for the cost and availability of inputs. Mining activity in parts of the District expanded further for a variety of precious metals and metallic elements used for specialized industrial purposes. Strong foreign demand for oil prompted additional increases in extraction activity. By contrast, warm weather held down demand for natural gas relative to seasonal norms, causing further declines in recent and planned extraction activity.
Real Estate and Construction
Home demand in the District persisted at very low levels, and conditions were little changed for commercial real estate. The sales pace for new and existing homes remained quite subdued, although scattered reports suggested modest improvement. Inventories of available homes stayed quite high, putting continued downward pressure on prices and construction activity. By contrast, demand for rental space remained robust, prompting further increases in construction of multifamily units. Conditions in commercial real estate markets were largely unchanged, and vacancy rates for office and industrial space stayed high in most parts of the District. However, additional declines in vacancy rates were noted for selected geographic areas such as the San Francisco Bay Area and Seattle. Contacts also noted recent improvement in financing availability and investor activity for well-leased office buildings. Financial Institutions Reports from District banking and business contacts indicated that loan demand improved a bit overall compared with the prior reporting period. The volume of new commercial and industrial loans edged up. The reports suggested that businesses generally remained very cautious in regard to capital spending decisions, but many continued to invest in information technology equipment aimed at enhancing productivity. Moreover, many businesses expect to modestly increase their capital spending in the first half of the year compared with the second half of last year, suggesting that growth in business loan demand may continue. The reports also noted continued stiff competition among lenders to extend credit to well-qualified small and medium-sized businesses, placing further downward pressure on loan rates and fees. Strong recent financial performance by technology companies backed by venture capital reportedly has spurred further investments of late. On the consumer side, the reports suggested little change in loan demand. Contacts reported slight improvement in overall credit availability, although lending standards remained relatively restrictive for many types of business and consumer loans.