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Beige Book Report: San Francisco

March 3, 2004

Reports from Twelfth District contacts indicate that the economy continued to expand soundly in January and early February. Consumer and producer prices generally were stable, although respondents noted increases in some energy and material costs. Respondents indicated that hiring activity in recent weeks was mixed, with moderate expansion of payrolls in retail, construction, agriculture, and high-tech manufacturing, and little new hiring in banking and the rest of manufacturing. Wage and salary increases remained restrained, with total compensation continuing to rise more noticeably. Sales of retail merchandise showed modest growth. Manufacturing activity in the District continued to improve, driven in part by an increase in demand for information technology upgrades by firms. Business conditions for cattle ranchers in the District recovered to some extent in recent weeks as fears surrounding mad cow disease apparently abated; other District agricultural and natural resource businesses faced stable conditions. Respondents noted solid house price appreciation and a brisk pace of new home construction in most District markets. Commercial real estate markets stabilized further. Reports from District banking contacts indicated that demand from businesses for commercial and industrial loans improved slightly from the previous survey period.

Prices and Wages
During the most recent survey period, District contacts generally noted little change in prices other than for energy products and certain raw material inputs, such as steel and nonferrous scrap metal. Several respondents reported that stiff competition, particularly among domestic businesses, continued to hold down final sales prices. In the telecommunications industry, competition among rival technologies and excess inventories restrained prices for wireline telecommunications providers; cable service providers, on the other hand, were able to increase prices somewhat after several months of flat rates.

Wage and salary pressures in the District remained modest in recent weeks. The costs of medical and workers' compensation insurance premiums rose further, however, particularly in California. According to respondents, increases in non-wage labor costs generally constrained hiring of full-time employees throughout the District, while hiring of temporary workers strengthened further. Indeed, the division of healthcare premium costs between employers and employees is a central issue in the labor strikes among grocery workers in Southern California and construction workers in Hawaii.

Respondents indicated that hiring activity since the last survey period was mixed. Contacts in banking and manufacturing, with the exception of high-tech manufacturing, generally reported little new hiring, while those in retail, construction, and agriculture noted moderate increases in payrolls. Looking ahead, most contacts expect little change in hiring activity in the near future, with the exception of contacts in high-tech manufacturing and retail, who expect the rate of hiring to pick up from its pace in recent weeks. Those contacts expecting an increase in hiring generally attributed it to improving business conditions. Those contacts expecting no change or a slowing of hiring, though, generally pointed to productivity gains stemming from the use of IT and other technologies which allow businesses to meet product demand without substantial increases in staffing.

Retail Trade and Services
District contacts indicated that sales of retail merchandise showed modest growth in the most recent survey period, particularly for mid-range department stores. An increase in consumer demand fueled increases in unit sales despite somewhat less discounting by retailers; inventory control generally was tight. Automobile dealers reported that sales of new and used domestic brands slowed a bit, while sales of imports performed better than domestic sales.

Business conditions in the services sector continued to improve in the District. Demand strengthened for media and high-tech services. The increased demand for high-tech services was reportedly due in large part to replacement and upgrading of information technology equipment by firms. Demand for preventative and outpatient healthcare services edged up further. Conditions in the District travel and tourism sector remained strong. Favorable snow conditions aided winter tourism activity in several areas of the District. Hotel occupancy rates improved and allowed many hotels to raise rates.

Manufacturing
District manufacturing activity picked up further in January and early February. Sales of semiconductors and other high-tech products strengthened, driven in part by increased business spending on information technology upgrades. Low inventory and high capacity utilization have led to modest increases in prices for these products. District apparel makers reported increased new orders and expansion of inventory levels, although capacity remained ample. The availability of raw materials remained uncertain for some industries in recent weeks; several manufacturers noted that prices for inputs, such as metals, escalated as a result of short supply.

Agriculture and Resource-related Industries
On balance, conditions in District agricultural markets remained stable in the most recent survey period. Prices for beef have firmed a bit in recent weeks, halting their steep decline following the mad cow incident in the state of Washington; however, prices have fluctuated recently due to uncertainty regarding export markets for beef and beef products. Prices for most other agricultural goods reportedly were stable and inventories generally remained in balance. Agricultural exports were helped by the depreciation of the dollar relative to several foreign currencies. In the energy sector, natural gas producers operated at close to full capacity in recent weeks, pushing up wholesale prices. Contacts indicate that large investments are currently being made to expand generation capacity.

Real Estate and Construction
District residential real estate markets generally were robust in January and early February. According to contacts, a limited supply of homes for sale combined with low mortgage interest rates led to solid price appreciation, though there are signs that appreciation may have slowed somewhat. Construction of new homes, particularly low to moderately priced homes, expanded further in recent weeks in most parts of the District. Contacts reported that skilled construction workers, such as carpenters and cement masons, were scarce in some areas. In Hawaii, the strike by workers of major concrete firms in early February reportedly delayed construction of major residential, retail, and public sector projects. As for commercial real estate, office vacancies and lease rates improved slightly in most District markets.

Financial Institutions
Contacts reported conditions in the banking sector to be generally healthy and stable in January and early February. Several respondents indicated that demand for commercial and industrial loans was up modestly from the previous survey period. As for residential real estate, contacts reported that mortgage loan volume, particularly for refinancings, was unusually low in December and January, though activity was higher than expected in early February.