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 late November through the
end of December. Upward price pressures remained very modest overall,
and upward wage pressures were quite limited. Holiday retail sales
reportedly were up over last year’s season, and demand edged up for
business and consumer services. District manufacturing activity grew
further on net. Production activity and sales remained robust for
agricultural producers and rose a bit further for providers of energy
resources. Activity in District housing markets stayed at very low
levels, and demand for nonresidential real estate generally was weak.
Reports from financial institutions indicated a slight increase in
business loan demand.

Wages and Prices

Price inflation remained quite limited for most final goods and
services during the reporting period. Contacts noted recent price
increases for selected commodities such as oil and for assorted food
items at the retail level, in particular for meat. However, intense
supplier competition for existing customers kept a lid on final sales
prices for the majority of retail goods and services. Contacts in most
sectors reported that upward wage pressure were modest, although they
continued to note rising costs for employee health benefits. Elevated
unemployment rates and limited hiring kept compensation gains modest
across most regions and sectors, with the exception of significant wage
increases for workers with specialized skills in selected manufacturing
and technology sectors. Looking ahead, most businesses expect little
change in the pace of hiring and wage gains next year. Retail Trade and
Services Retail sales were up compared with last year’s holiday season,
with gains reported by traditional department stores as well as discount
chains. Inventories generally were at or near desired levels given the
pace of sales, although contacts reported an excess of winter apparel
resulting from unusually mild weather. Demand remained largely unchanged
compared with prior reporting periods for retailers of major appliances,
furniture, and electronics. Sales improved somewhat for grocers. Sales
of new automobiles rose further overall during the reporting period,
although slightly softer demand was noted for the last few weeks. Demand
for used vehicles remained robust, and dealers reported marked
improvement in the quality of trade-ins compared with earlier in the
year. Demand for business and consumer services was mixed but appeared
to expand slightly on net. Demand for transportation services remained
largely flat, as did demand for professional services such as legal
services and accounting. Sales were largely stable on a seasonal basis
for restaurants and other food-service providers. For providers of
health-care services, demand softened a bit further, as higher emergency
room visits were more than offset by declines in inpatient admissions
and surgeries. By contrast, sales continued to expand for providers of
technology services to businesses and consumers, although the pace of
growth continued to slow. District travel activity picked up further,
with additional growth in demand reported for the tourism and business
segments of the market alike.

Manufacturing

District manufacturing activity expanded further on balance during
the reporting period of late November through the end of December.
Makers of commercial aircraft and parts reported further expansion in
production activity, with ongoing growth in new orders attributed in
part to rising demand for fuel-efficient aircraft. Activity remained
largely stable for metal fabricators and is expected to remain so for
the foreseeable future. For manufacturers of semiconductors and other
technology products, demand growth continued to slow, and capacity
utilization dipped a bit from existing high levels as companies sought
to hold down inventory growth. Capacity utilization rates for petroleum
refiners remained largely stable or rose somewhat as robust global
demand for distillate products, such as diesel and jet fuel, offset weak
domestic demand for gasoline. Activity remained exceptionally sluggish
for manufacturers of wood products. Agriculture and Resource-related
Industries Demand was robust for agricultural producers and grew a bit
for natural resources used for energy production. Final sales and orders
for most agricultural products, including livestock and a variety of
crops, continued to expand. Elevated price levels for a range of metals
supported further expansion of mining activity in parts of the District.
Overall demand for crude oil rose slightly, largely reflecting robust
foreign demand, while mild winter weather has kept demand for natural
gas subdued and caused extraction activity to wane a bit.

Real Estate and Construction

Home demand in the District remained at very low levels, and demand
for commercial real estate stayed weak. The sales pace for new and
existing homes was somewhat mixed across the District but sluggish
overall. In response to slow sales and continued high numbers of
financially distressed properties, home construction activity remained
moribund and prices were mostly flat. Demand for commercial real estate
remained weak overall, keeping vacancy rates for office and industrial
space elevated in most parts of the District. However, in selected
geographic areas, such as the San Francisco Bay Area and Seattle,
expansion in the information technology sector continued to spur demand
growth for office and industrial space.

Financial Institutions

Reports from District banking contacts indicated that loan demand
improved a touch relative to the prior reporting period. The volume of
new commercial and industrial loans inched up, although contacts noted
that businesses remain very cautious in their approach to capital
spending. Contacts again noted stiff competition among lenders to extend
credit to well-qualified small and medium-sized businesses, causing
sustained downward pressure on loan rates and fees. Contacts from the
venture capital sector noted a slight pickup in IPO and investment
activity, on the heels of a slowdown in the prior reporting period. On
the consumer side, loan demand remained largely unchanged. In general,
lending standards stayed relatively restrictive for many types of
business and consumer loans, despite further modest improvements in
overall credit quality.

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

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