WASHINGTON (MNI) – The following is the Beige Book section on the
Federal Reserve’s Twelfth District, published Wednesday:

TWELFTH DISTRICT-SAN FRANCISCO

Summary

Economic activity in the Twelfth District continued to edge up
during the reporting period of mid-October through mid-November. Despite
rising prices for selected commodities, price increases for final goods
and services remained quite limited, and upward wage pressures were
largely absent. Sales of retail items and services rose a bit further.
Manufacturing activity in the District continued to expand on net. Sales
of agricultural products were robust, and demand strengthened for
providers of energy resources. Housing demand stayed subdued, and demand
for commercial real estate remained weak but showed signs of life in a
few areas. Financial institutions reported that lending activity was
largely unchanged.

Wages and Prices

Price inflation was limited for most items. Contacts noted price
increases for an assortment of raw materials, such as oil, wheat, and
aluminum, and for selected products sourced from China, such as apparel.
However, final prices for most retail items and service categories
continued to be restrained by weak demand and widespread competition.
Upward wage pressures were virtually nonexistent, held down by minimal
demand for new employees and high unemployment in most parts of the
District. However, contacts continued to point to significant increases
in employee benefit costs, particularly for health care. Hiring plans
for permanent employees remained quite limited in most sectors, although
a few reports pointed to expectations for a larger surge of temporary
holiday hires than in the past two years.

Retail Trade and Services

Retail sales rose further on balance but remained lackluster
overall. Modest improvements in sales were reported for traditional
department stores as well as discount chains, with the strongest gains
again noted for moderately priced home and garden products. Sales were
characterized as flat to down for grocers and for retailers of furniture
and major appliances. Contacts generally anticipate that holiday season
retail sales will exceed their levels from last year, with expected
nominal gains ranging from 2 to 3 percent up to 5 to 7 percent. Reports
on holiday inventories were mixed, with some contacts reporting
continued lean inventories and others noting slightly elevated levels.
New domestic and imported automobile sales improved further, spurred
largely by rising demand for light trucks and vans. Sales of used
vehicles were strong, but contacts noted that supply remained tight.
Retail contacts reported that capital spending was quite limited and
focused largely on labor-saving technologies.

Demand for services firmed further. Sales expanded for providers of
technology services, prompted in part by a focus on efficiency-enhancing
software investments in most sectors of the economy. Demand for
professional services, such as legal and accounting, held largely
stable. Providers of energy services reported further demand growth from
households and businesses. Travel activity improved further in much of
the District, spurred by growth in business travel as well as tourism.
Visitor volumes and hotel occupancy rates showed solid gains in Hawaii
but were flat to down in San Diego.

Manufacturing

District manufacturing activity posted further gains during the
reporting period of mid-October through mid-November. For makers of
commercial aircraft and parts, growth in new orders for some aircraft
combined with an extensive backlog to keep production rates at or near
capacity. Demand grew further for manufacturers of semiconductors and
other technology products, with reports highlighting rising sales, high
levels of capacity utilization, and plans for expanded capital spending
by some companies in the near term. Demand continued to tick up for
metal fabricators, although production remained well below normal.
Despite modest improvements in demand, elevated inventories caused
petroleum refiners to further reduce their production activity. Sales
remained anemic for manufacturers of wood products.

Agriculture and Resource-related Industries

Demand was robust for agricultural producers and improved on net
for natural resources used for energy production. Final sales and orders
rose for assorted crops and livestock products, and, other than price
increases for livestock feed, reports indicated little change in input
costs. Reductions in overseas yields due to earlier unfavorable weather
conditions combined with the lower value of the U.S. dollar to boost
sales for domestic producers of corn, wheat, and other food grains. Oil
extraction activity rose somewhat, as robust demand growth from emerging
markets along with modest improvements in domestic demand pushed up the
price of oil. Extraction activity for natural gas was largely steady
despite an ongoing decline in its price.

Real Estate and Construction

Activity in residential and nonresidential real estate markets
generally remained unchanged at very low levels. The pace of home sales
was mixed across areas of the District but appeared stable to down
slightly on balance, despite improved affordability arising from low
mortgage rates and past price declines. New home construction remained
at exceptionally low levels, as sluggish sales and continued high rates
of foreclosure caused the availability of new and existing homes to
remain elevated. Demand remained weak overall in commercial real estate
markets, and tenants in some areas continued to receive rent reductions
and other concessions. However, further increases in leasing activity
were noted for some major markets in the District, such as for
technology companies in San Francisco, along with rising market values
and improved availability of financing for investment transactions.

Financial Institutions

District banking contacts reported that loan demand was largely
unchanged on balance compared with the previous reporting period. Demand
for commercial and industrial loans inched up in some areas but remained
restrained by businesses’ cautious approach to capital spending. On the
consumer side, loan demand appeared to weaken slightly, which contacts
attributed in part to households’ desire to deleverage. Lending
standards remained relatively restrictive for business and consumer
lending, and a few contacts pointed to ongoing struggles with credit
quality for some banks.

** Market News International Washington Bureau: 202-371-2121 **

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