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

Twelfth District economic activity expanded at a modest pace during
the reporting period of June through the beginning of July. Upward price
pressures eased somewhat and remained quite contained overall, and
upward wage pressures were limited. Sales of retail items rose a bit,
and demand grew for most business and consumer services. District
manufacturing activity increased slightly on balance. Demand continued
to expand for agricultural producers, while activity was largely
unchanged for providers of energy resources. Sales and construction
activity edged up in District housing markets, and demand strengthened
slightly for commercial real estate. Contacts from financial
institutions reported a small increase in overall loan demand and slight
improvements in credit quality and availability.

Wages and Prices

Upward price pressures were very modest during the reporting
period. Price declines were noted for selected raw materials and energy
inputs, especially gasoline. The declines in selected input costs
combined with robust competition among firms in most sectors to hold
down final prices for a wide range of retail goods and services. Looking
ahead, most contacts expect prices for their products to remain largely
unchanged through the balance of the year.

Upward wage pressures were limited to a few worker groups, although
some contacts pointed to more general increases in the costs of pension
plans and other employee benefits. Wage gains continued to be held down
by high levels of unemployment and tepid demand for new workers. The
most pronounced gains were reported for workers with specialized skills
in the application of information technologies, along with selected
narrow groups of skilled manufacturing workers.

Retail Trade and Services

Retail sales expanded a bit further overall. Modest sales gains
were reported for discount chains as well as traditional department
stores, and inventories generally were at or near desired levels given
the pace of sales. However, some contacts reported growing concern about
a softening of demand in the high-end segment of the market. Demand
remained largely flat for retailers of home furnishings and major
appliances, as declines in television sales offset increases for
flooring and appliances. Similarly, demand stayed largely stable for
grocers as consumers remained focused on necessities. The sales pace for
new automobiles stayed high, bolstered in part by pent-up demand for
Japanese brands whose inventories have returned to normal after being
constrained by last year’s natural disaster in that country.

Demand for most business and consumer services grew further.
Activity continued to expand at a solid pace for transportation services
such as trucking, although contacts noted that the pace of growth has
slowed somewhat in recent months. Sales grew modestly for providers of
technology services, as continued weakness in demand from Europe partly
offset growth elsewhere. Advertising revenues rose for radio and
television broadcasters, with additional gains expected in the second
half of the year. By contrast, providers of professional services such
as legal and accounting reported that activity was flat. Demand picked
up a bit for restaurants and other food-service providers and continued
to trend up in the travel and tourism industry: contacts in Hawaii and
Southern California reported further gains in visitor volumes and hotel
occupancy rates and decreased reliance on price discounting.

Manufacturing

District manufacturing activity rose a bit further on balance
during the reporting period of June through the beginning of July.
Manufacturers of semiconductors and other technology products noted
continued high rates of capacity utilization and sales but also some
emerging softness in demand. For makers of commercial aircraft and
parts, an extensive order backlog and additional new orders kept
production rates near capacity. Demand for steel was mostly stable at
somewhat low levels, and activity weakened a bit for processed scrap
metal as a result of a decline in overseas demand. Conditions remained
robust in the pharmaceutical manufacturing sector. For petroleum
refiners, capacity utilization rates were largely stable, as growing
export sales offset subdued domestic demand.

Agriculture and Resource-related Industries

Demand for agricultural products expanded further, while extraction
activity for energy resources was mostly unchanged. Final sales and
orders grew for many crop and livestock products. This was stimulated in
part by continued growth in overseas exports, although the reports
suggested that this source of growth is on the wane. Contacts noted
modest declines for input costs, particularly for energy and other
petroleum-based products. For energy resources, contacts reported little
change in extraction activity for oil and natural gas.

Real Estate and Construction

Home demand in the District improved modestly overall, and demand
for commercial real estate ticked up on net. The sales pace for new and
existing homes grew a bit further in many areas, although it stayed well
below its historical average. Improvements in the pace of sales helped
to reduce the inventory of available homes, prompting additional modest
expansion of home construction activity. Similarly, strong demand for
rental space spurred further increases in construction of multifamily
units. Looking ahead, most contacts expect home sales and prices to
improve a bit further during the second half of the year. Demand for
commercial real estate inched up, as reflected in slight declines in
office and industrial vacancy rates in some parts of the District.
Growth in the technology sector continued to support improving demand
for nonresidential real estate in the San Francisco Bay Area and Seattle
markets, although the pace of improvement has slowed of late, with
contacts noting a recent decline in rental inquiries for vacant
properties.

Financial Institutions

District banking contacts reported that loan demand grew a bit
during the reporting period. Although most businesses remained highly
cautious in their capital spending plans and attitudes toward debt
financing, the volume of new commercial and industrial loans expanded
further. Demand for consumer credit grew on net, especially for auto
loans. Reports continued to indicate stiff competition among lenders to
provide credit to well-qualified small and medium-sized businesses,
placing downward pressure on rates and fees. Contacts also noted
additional improvements in overall credit quality and availability,
although lending standards remained somewhat restrictive for most
business and consumer loans.

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

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