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 grew modestly during the
reporting period of June through mid-July. Upward price pressures eased
overall as the prices of oil and selected raw materials fell, and upward
pressures on wages remained quite limited on balance. Sales of retail
items were mixed, while demand for business and consumer services rose
somewhat. District manufacturing activity strengthened slightly. Sales
continued to grow for agricultural producers, while mining and
extraction activity for natural resources expanded further. Home sales
and construction remained sluggish, and demand for commercial real
estate was weak overall, although continued modest strengthening was
noted for some areas. Contacts from financial institutions reported
largely stable loan demand.

Wages and Prices

Upward price pressures were limited during the reporting period.
Price declines were noted for oil and selected raw materials such as
aluminum. Furthermore, modest demand and stiff competition continued to
hold down final prices for most retail goods and services, although food
prices remained quite elevated. Looking ahead, contacts in most sectors
anticipate that prices for their products will remain largely stable to
slightly up through the end of the year, with larger gains expected for
apparel.

Contacts reported that upward wage pressures were very modest
overall, although some pointed to notable increases in the costs of
employee benefits. Compensation gains in most regions and sectors of the
District continued to be held down by high unemployment and limited
hiring activity. However, upward wage pressures remained pronounced in
various sectors for workers with specialized skills in the application
of information technology.

Retail Trade and Services

Retail sales were mixed. Sales were largely flat for discount
chains, while traditional department stores, particularly those catering
to the luxury segment of the market, noted ongoing sales gains.
Similarly, retailers of big-ticket items such as major appliances and
furniture reported modest sales increases since the prior reporting
period. Grocery sales remained largely flat. Sales of new automobiles
declined, as lingering supply chain disruptions associated with the
natural disaster in Japan earlier this year significantly reduced dealer
inventories. In response to the shortage of new vehicles, dealer demand
for used vehicles ramped up, further bolstering sales prices and
trade-in values.

Demand for business and consumer services increased on balance.
Sales continued to expand for providers of technology services, in
particular for digital media services used for Internet-capable mobile
devices. By contrast, demand for transportation services remained
largely flat, as did demand for professional services. Suppliers of
energy services reported further growth in deliveries to households and
businesses, although the pace of growth slowed. Providers of health-care
services reported that demand for their services remained weak.
Restaurants and other food-service providers saw demand soften slightly.
However, conditions continued to improve in the travel and tourism
industry, with further demand growth reported in both the business and
tourism segments of the market.

Manufacturing

District manufacturing activity strengthened a bit further during
the reporting period of June through mid-July. Production rates remained
near capacity for makers of commercial aircraft and parts. Demand
improved modestly for manufacturers of semiconductors and other
technology products, with reports pointing to high levels of capacity
utilization, continued growth in sales, and inventories that were at or
near desired levels given the pace of sales. Production activity and
sales improved somewhat for metal fabricators, with gains in foreign
demand more than offsetting weak domestic demand. Similarly, capacity
utilization rates remained largely stable for petroleum refiners, as
export growth for gasoline and distillate products helped to reduce
inventories. Demand continued to be especially weak for wood product
manufacturers, with the exception of the pulp and paper sector, which
has seen sustained increases in orders.

Agriculture and Resource-related Industries

Demand continued to grow for agricultural products, and it expanded
further on net for mined products and natural resources used for energy
production. Final sales and orders were robust and continued to grow for
a range of crop and livestock products. Contacts generally noted stable
input costs and supply conditions, although wildfires in Arizona caused
widespread destruction of grazing land, prompting ranchers to reduce
their stocks and causing sharp financial losses in some cases. Mining
activity in parts of the District expanded further in response to
elevated prices for an assortment of metals. Strong global demand for
oil combined with a slight increase in domestic demand, prompting
additional increases in extraction activity, and extraction of natural
gas was largely stable or grew somewhat.

Real Estate and Construction

Home demand in the District was essentially unchanged at very low
levels, and demand for commercial real estate remained weak, albeit with
further modest improvement in some areas. The pace of home sales
remained sluggish across the District, putting downward pressure on
prices and the pace of new home construction, although sales of existing
homes picked up a bit in parts of California. In contrast to
homeownership, demand for rental space continued to grow, prompting rent
increases and rising construction activity for multifamily units in some
areas. Conditions in commercial real estate markets remained
challenging, as vacancy rates for office and industrial space stayed
high in many parts of the District. However, contacts continued to note
improvement in investor demand and leasing activity in a few major
markets, primarily in the San Francisco Bay Area and Seattle.

Financial Institutions

District banking contacts reported that loan demand was little
changed on balance compared with the previous reporting period.
Businesses’ cautious approach to capital spending continued to restrain
demand for commercial and industrial loans, although scattered reports
pointed to intensifying competition among lenders to extend credit to
well-qualified small and medium-sized businesses. Looking ahead, reports
from contacts in most sectors suggest that capital spending will expand
only modestly through the duration of the year. Consumer loan demand was
largely unchanged. Lending standards remained relatively restrictive for
most categories of business and consumer loans. Venture capital
financing expanded further, with contacts noting heightened levels of
IPO activity.

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

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