WASHINGTON (MNI) – The following is the latest Beige Book survey of
economic conditions in the Federal Reserve’s Twelfth District, published
Wednesday:

TWELFTH DISTRICT – SAN FRANCISCO

Summary

Economic activity in the Twelfth District continued to grow at a
moderate pace during the reporting period of April through late May.
Price increases for final goods and services were very modest, and
upward wage pressures were quite limited overall. Sales of retail items
rose, as did demand for consumer and business services. District
manufacturing activity picked up further. Sales remained robust for
agricultural producers, while conditions were mixed for providers of
energy resources. Demand rose modestly for residential real estate and
also improved a bit for commercial real estate. District banking
contacts reported that overall loan demand edged up, and they noted
further slight improvements in credit quality.

Wages and Prices

Price inflation remained quite limited for most final goods and
services. Contacts noted price declines for energy inputs, particularly
oil, and for an assortment of food items at the retail level. More
generally, upward price pressures were quite modest, as suppliers of
final goods and services were readily able to meet the existing modest
growth in demand. Contacts reported that upward wage pressures were
quite limited overall. High unemployment and modest demand for new hires
continued to hold down compensation gains for workers in most industries
and occupations. However, wage and compensation gains remained
substantial in various industries and regions for workers with
specialized skills in the application of information technology. Retail
Trade and Services Retail sales grew modestly on balance. Gains were
reported by traditional department stores and discount chains alike,
although contacts noted a slightly slower pace of growth compared with
the prior reporting period. Inventories generally were at or near
desired levels given the current pace of sales. Demand growth slowed for
retailers of home furnishings and major appliances, resulting in mostly
flat sales. Demand was largely unchanged for grocers. Sales of new
automobiles rose during the reporting period, although the pace of
growth has moderated from that seen in the most recent reporting
periods.

Demand remained strong for used vehicles and combined with tight
inventories to keep prices elevated.

Demand for business and consumer services rose a bit further on
balance. Activity was largely flat for professional services such as
legal services and accounting, as well as for health-care services. By
contrast, demand improved for transportation services such as trucking.
Sales rose at a modest pace for providers of technology services, with
the pace held down in part by weaker sales to European buyers; however,
contacts continue to anticipate that growth will pick up in the second
half of the year. Activity expanded further for radio and television
broadcasters, spurred by rising demand for advertising slots. Sales
activity improved further for restaurants and other food-service
providers. District travel activity continued to pick up, with contacts
in major markets such as Southern California, Hawaii, and Nevada
highlighting ongoing improvements in visitor counts and hotel occupancy
rates.

Manufacturing

District manufacturing activity rose further during the reporting
period of April through late May. New orders continued to improve for
manufacturers of semiconductors and other technology products, and
inventories were reported to be at appropriate levels given the
prevailing pace of sales. Contacts in the pharmaceutical manufacturing
sector reported robust demand. Orders grew a bit for makers of
commercial aircraft and parts, driven primarily by demand for
fuel-efficient aircraft, and an extensive order backlog kept production
rates at very high levels. For petroleum refiners, strong global demand
supported an uptick in capacity utilization rates. Demand improved
slightly for steel manufacturers but remained depressed for
manufacturers of wood products. Agriculture and Resource-related
Industries

Demand for agricultural products remained robust, while extraction
activity for energy resources continued to be uneven. Orders and sales
expanded further for most crop and livestock products, spurred in part
by strong growth in overseas exports. However, contacts noted that the
costs of energy inputs remained quite high, and they cited renewed
concerns that drought in some areas may undermine growing conditions in
coming months. For energy resources, elevated price levels continued to
support a pickup in oil extraction activity. By contrast, price declines
for natural gas resulted in a further reduction of extraction activity,
primarily at sites for which the extracted amount of valuable liquid
byproducts is low. Real Estate and Construction District home demand
improved a bit further overall, and demand for commercial real estate
picked up slightly on balance. Sales of new and existing homes ticked up
in many areas, although the pace remained well below its historical
average. The pickup was supported in part by slight improvements in
financing availability, which has been an important factor holding down
sales in the recent past. Faster sales reduced the inventory of
available homes, which in turn caused home construction activity to rise
slightly in some areas. By contrast, home prices remained largely flat.
On the commercial side, vacancy rates for office and industrial space
stayed elevated throughout many parts of the District. However, contacts
noted widening signs of improved demand. The San Francisco Bay Area and
Seattle markets continued to benefit from growth in the technology
sector, which is prompting rapid absorption of commercial space and
encouraging new construction. Contacts noted improved demand for office
and retail space in other areas as well, such as Boise, Idaho.

Financial Institutions

Reports from District banking contacts indicated that loan demand
showed further slight gains overall. Although businesses remained very
cautious in their capital spending plans, demand edged up a bit further
for new commercial and industrial loans. Furthermore, reports from most
sectors suggested that capital spending is likely to increase modestly
in the second half of the year compared with the first. Demand for
consumer credit appeared largely unchanged. Further improvement in
overall credit quality was noted, and continued fierce competition to
extend credit to well-qualified small and medium-sized businesses has
kept a lid on loan rates and fees. Overall, however, lending standards
remained somewhat restrictive for many types of business and consumer
loans.

** MNI Washington Bureau: 202-371-2121 **

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