TWELFTH DISTRICT-SAN FRANCISCO

Economic activity in the Twelfth District continued to expand
modestly during the reporting period of mid-July through the end
of August. Upward price pressures were mixed but appeared to
ease overall, and upward pressures on wages were subdued. Demand
for retail items edged up on balance, as did demand for business
and consumer services. Manufacturing activity in the District
grew a bit further. Demand remained robust for agricultural
producers but fell slightly for providers of energy resources.
Activity in District housing markets stayed sluggish, and demand
for commercial real estate was largely unchanged. District
banking contacts indicated that overall loan demand was stable
or inched down.

Wages and Prices

Upward price pressures were very limited on net during the
reporting period. Further modest price declines were noted for
energy inputs and some raw materials. Stiff competition among
domestic firms, combined with weak final demand, resulted in
largely stable prices for most categories of final goods and
services. The primary reported exceptions were clothing and
medical care, for which recent cost increases were passed
through to final prices.

Upward wage pressures were largely nonexistent, as compensation
gains were held down by high levels of unemployment and limited
demand for new hires. As a result of uncertain product demand,
businesses in most sectors expect to remain highly cautious in
regard to hiring for the foreseeable future, suggesting that
compensation pressures are likely to remain subdued. However,
contacts continued to report significant upward wage pressures
for workers with advanced skills in technology fields.

Retail Trade and Services

Retail sales were mixed but rose a bit overall. For general
merchandise such as apparel and smaller household items,
contacts reported modest improvements in sales, with stronger
performance for traditional department stores than for discount
chains. By contrast, retailers of major appliances and furniture
reported weaker demand resulting from a renewed sense of caution
on the part of consumers. Grocery sales were largely flat. Sales
of new automobiles improved somewhat, despite ongoing shortages
of parts and assembled vehicles for some brands arising from the
natural disaster in Japan earlier this year. The demand for used
vehicles continued to firm, with contacts noting rising sales
and additional upward pressure on prices and trade-in values.

Demand for business and consumer services continued to
strengthen overall. Sales expanded further for providers of
technology services, as consumer demand for software, e-books,
and mobile applications continued to grow. Providers of
professional services such as law and accounting reported that
demand was little changed from the prior period. Similarly,
demand for transportation services was characterized as largely
flat. For energy utilities, demand waned a bit during the
beginning of the reporting period but improved later. Providers
of health-care services reported that demand strengthened
somewhat. Conditions in the District’s travel and tourism
industry improved further, with demand growth reported for the
business and tourism segments alike.

Manufacturing

District manufacturing activity was mixed but appeared to grow
slightly during the reporting period of mid-July through the end
of August. Although manufacturers of semiconductors and other
technology products reported slower growth for new orders and
sales, capacity utilization rates remained high and inventories
were near desired levels given the pace of sales. For makers of
commercial aircraft, significant increases in new orders for
narrow-body aircraft combined with an existing order backlog to
keep production rates near capacity. A metal fabricator noted
that sales were “steady but slow” and raw materials were readily
available. Petroleum refiners reported slightly weaker demand
and capacity utilization rates that were largely stable, causing
product inventories to rise somewhat. Demand held at very low
levels for manufacturers of wood products.

Agriculture and Resource-related Industries

Demand grew further for agricultural products and metals but was
down slightly for natural resources used for energy production.
Orders and sales continued to expand for a wide variety of crop
and livestock products, especially cattle and cotton. Contacts
noted that agricultural input costs have stabilized following
significant increases in the spring. Rising sales prices for
assorted metals spurred further increases in mining activity in
parts of the District. Overall demand for crude oil weakened a
bit, primarily reflecting weaker domestic demand, but extraction
activity for natural gas was largely unchanged.

Real Estate and Construction

Demand for housing and for commercial real estate was little
changed from existing low levels. Although the reports pointed
to scattered signs of improvement in the entry-level and high-
end segments of the District’s housing markets, the pace of home
sales and construction remained depressed. By contrast, demand
for rental space continued to grow, enabling landlords to
increase rents and scale back tenant concessions in some areas.
Demand for commercial real estate remained weak overall, and
vacancy rates for office and industrial space stayed elevated
throughout the District. Conditions were mixed across geographic
markets, with deterioration in leasing activity for some areas
contrasting with ongoing improvements in areas that have
benefited from growth in the technology sector, such as the San
Francisco Bay Area and Seattle.

Financial Institutions

Reports from District banking contacts indicated that loan
demand was largely stable to marginally down compared with the
prior reporting period. Citing heightened levels of uncertainty,
some businesses showed a reduced desire to engage in
expansionary capital spending, reportedly causing demand for
commercial and industrial loans to weaken slightly. Contacts in
most sectors reported downward revisions to their expectations
for growth in their industry for the remainder of the year,
suggesting that capital spending will remain muted in coming
months. On the consumer side, loan demand was largely unchanged.
While lending standards remained relatively restrictive for
business and consumer loans, the reports pointed to ongoing
improvements in overall credit quality and some loosening of
credit standards for selected borrowers.

Article source: http://www.bloomberg.com/news/2011-09-07/u-s-federal-reserve-beige-book-san-francisco-district-text-.html