WASHINGTON (MNI) – The following is the text the San Francisco
section of the Federal Reserve’s Beige Book report on current financial
conditions released Wednesday:

TWELFTH DISTRICT-SAN FRANCISCO

Summary

Economic activity in the Twelfth District continued to grow at a
moderate pace during the reporting period of October through
mid-November. Price increases for final goods and services were limited,
and upward pressures on wages were subdued overall. Sales of retail
items rose further, and demand grew modestly for business and consumer
services. District manufacturing activity edged up on balance. Sales
continued to grow for agricultural producers, and activity expanded for
extractors of energy and other natural resources. Demand for residential
and nonresidential real estate remained weak on balance. Contacts from
financial institutions reported little or no change in overall loan
demand.

Wages and Prices

Price inflation for final goods and services was limited during the
reporting period. Contacts noted a recent uptick in the prices for
energy inputs, particularly oil, and price increases for assorted food
items at the retail level. However, the combination of robust supplier
competition and lackluster final demand continued to hold down price
pressures for most retail goods and services.

Upward wage pressures were very modest overall, although contacts
noted persistent upward pressure on benefit costs, especially for
employee health care. High levels of unemployment and limited demand for
new employees kept compensation gains minimal in most regions and
sectors. The primary exception was workers in information technology
fields, such as software developers, who continued to see high levels of
recruiting activity and significant wage increases.

Retail Trade and Services

Retail sales grew further on balance. Modest gains were noted for
traditional department stores and discount chains alike, with particular
demand strength for small appliances and other inexpensive household
products. By contrast, sales were largely unchanged for retailers of
major appliances, furniture, and electronics. Sales were largely flat
for grocers, and industry contacts noted that they are keeping a close
eye on inventories at the start of the holiday season to avoid
overstocking. Sales of new automobiles continued to strengthen, with
replenished inventories for some Japanese brands supporting sales gains
in response to growing consumer demand. For the upcoming holiday retail
season, contacts generally expect sales to match or slightly exceed the
levels reached during last year’s season. Demand for business and
consumer services was largely stable or slightly improved on balance.
Sales continued to grow for providers of technology services, in
particular for software applications used for mobile computing and
communication devices, although the pace of growth eased a bit further.
Energy utilities noted largely stable demand from businesses and
households.

Demand for professional services, such as legal services and
accounting, also was described as largely unchanged. Providers of
health-care services reported that demand softened a bit further, as
reflected in a slight decline in inpatient admissions and surgical
procedures. Activity in the District’s travel and tourism industry
picked up: contacts in Hawaii noted an uptick in visitor volumes,
reversing the slight decline in the prior period, and contacts in San
Diego and Las Vegas reported ongoing increases in hotel occupancy rates.

Manufacturing

Manufacturing activity in the District firmed a bit further on net
during the reporting period of October through mid-November. For
manufacturers of semiconductors and other technology products, capacity
utilization rates remained quite high; demand growth stayed positive but
continued to slow, especially for components used in consumer
electronics products. Production activity expanded a bit from existing
high levels for makers of commercial aircraft and parts, as modest
growth in new orders added to an existing backlog. Activity was largely
stable or up slightly for metal fabricators. For petroleum refiners,
weak domestic demand for gasoline was offset by robust domestic and
export demand for distillate products, notably diesel fuel, holding
overall capacity utilization rates near their long-term averages.
Production activity continued to expand for food manufacturers, while
demand stayed stuck at depressed levels for manufacturers of wood
products.

Agriculture and Resource-related Industries

Demand growth and sales were robust for agricultural products, and
extraction activity expanded further for minerals and natural resources
used for energy production. Orders and sales continued to grow for
assorted crops and livestock products, especially for those with
extensive export markets. Contacts noted that agricultural input costs
remained largely stable, with the exception of significant increases in
the cost of fertilizer. Mining activity expanded further, propelled by
high price levels for a variety of metals. Extraction activity grew for
crude oil, largely in response to robust foreign demand, and demand for
natural gas was largely unchanged.

Real Estate and Construction

Home sales and construction remained anemic, and demand for
commercial real estate was largely stable but weak. The pace of home
sales was quite subdued, with contacts noting that despite low interest
rates, relatively strict lending requirements have constrained
purchasing activity. As a result of lackluster sales and the large
number of financially distressed properties, the pace of home
construction stayed depressed and home prices remained flat. By
contrast, demand for residential rental units grew further. Demand for
commercial real estate remained weak overall, as reflected in elevated
vacancy rates and heightened caution by tenants to commit to long-term
leases. However, declining vacancy rates were noted for selected
geographic areas that are benefiting from growth in the technology
sector, primarily the San Francisco Bay Area and Seattle. The vast
majority of contacts expect demand in residential and commercial real
estate markets to change little in the near term.

Financial Institutions

Reports from District banking contacts indicated that loan demand
was largely unchanged compared with the prior reporting period. With
businesses remaining cautious in their approach to capital spending, the
volume of new commercial and industrial loans stayed slightly depressed
overall. However, reports continued to indicate stiff competition among
lenders to extend credit to well-qualified small and medium-sized
businesses, which has been creating downward pressure on rates and fees.
No changes in demand for consumer credit were noted. Slight improvements
in overall credit quality were noted, but lending standards remained
relatively restrictive for many types of business and consumer loans. In
a departure from prior positive reports, contacts from the venture
capital sector reported a slowdown in investment activity and funding.

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

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