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Beige Book Report: San Francisco

April 21, 2004

Reports from business contacts indicate that the Twelfth District's already firm economic expansion acquired some additional momentum in March and early April. Price inflation for final goods and services has remained low overall, although increases in the prices of energy and key industrial commodities raised costs in some industries. Some District firms have increased their hiring pace for permanent employees or indicated plans to do so in the near future. District retailers and service providers saw generally solid demand. Manufacturing activity picked up for a variety of products. Both domestic and foreign demand for District agricultural and resource-related products reportedly was solid. Activity in residential real estate markets remained vibrant, while the glut in commercial real estate markets eased a bit. Most banks reported solid loan demand.

Prices and Wages
The reports indicated a slight pickup in the pace of price increases in recent weeks. Contacts noted rising prices for gasoline and certain commodities, notably steel. These increases raised transportation costs for consumers and businesses and also raised production costs in selected industries, but the overall impact on final prices was limited, reportedly due to stiff competition in most industries.

Upward wage and salary pressures in the District were quite modest during the survey period. However, the rising cost of health benefits increased labor costs somewhat, and employers have responded in part by shifting some of the burden to workers. In labor markets more generally, respondents noted a modest pickup in hiring by District businesses, especially in the construction, education, health-care, and retail sectors. Hiring was focused largely on permanent rather than temporary workers, and some firms not currently hiring reportedly plan to do so in the near future. By contrast, some state and local governments cut staff due to budget constraints.

Retail Trade and Services
District retail sales were solid overall and generally stable relative to the previous survey period. Automobile sales were at high levels, sustained in part by renewed financing incentives. However, sales were stronger for foreign than for domestic makes, and inventories were at unusually high levels.

District service providers saw further strengthening in demand. Sales increased for media services and high-tech services in some areas, and reports indicated that activity at District seaports had stepped up to handle increased merchandise trade flows. Demand for preventive and outpatient health-care services edged up further, although rising out-of-pocket payments for patients reportedly have led to reduced use of hospital services in some areas. District travel and tourist activity generally was solid, with notable strength reported for Hawaii, Utah, Arizona, and Southern California. A Southern California respondent also noted substantial sales gains in the restaurant industry there. The weak dollar relative to the yen reportedly helped boost Japanese visitor counts to selected District destinations. Although hotel occupancy rates rose in many areas, room prices generally remained somewhat low compared to prior years, reportedly due in part to rising reliance on bargain deals available through the Internet.

Manufacturing
District manufacturers generally faced increased demand for a variety of products, consistent with reports of a further pickup in capital spending by firms during the survey period. Sales of semiconductors and other high-technology products strengthened, as businesses replaced existing stocks of computer and communications equipment. Prices for high-tech products rose modestly, due to reduced inventories and increased capacity utilization. Both domestic and foreign demand for wood products was strong, and prices for pulp, containerboards, and wood panels edged up as a result. District apparel makers saw rising orders, and relatively lean inventories kept prices elevated in recent weeks. The weak dollar has helped boost exports of many manufactured products; however, it also has increased prices on imported raw materials and intermediate goods, exacerbating increased production costs associated with rising scarcity of selected commodities, particularly steel.

Agriculture and Resource-related Industries
District contacts reported robust demand and sales for a variety of agricultural and resource-related items. Demand for nuts was especially strong, and several countries have relaxed bans on imports of American cattle, increasing the demand seen by District cattle ranchers. More generally, agricultural contacts reported that demand for items with high protein content has been boosted by the growing popularity of protein-heavy diet regimes. Overseas demand for District agricultural products remained quite strong, held up in part by the low value of the dollar. In energy markets, capacity utilization was high for electrical generation and oil and natural gas extraction, and contacts noted scattered capacity increases.

Real Estate and Construction
Residential real estate markets remained robust during the most recent survey period, and conditions improved a bit in nonresidential markets. The pace of home sales, price appreciation, and construction was rapid, especially in Southern California and Hawaii, and new homes sold quickly, often before completion. However, higher-priced homes typically remained on the market longer than less-expensive homes. With low interest rates pushing up home ownership rates, apartment vacancies edged up further in some areas. On the commercial side, demand for office space improved a bit, with a slight dip in vacancy rates reported for some markets. Moreover, demand for industrial and retail space was solid in parts of Southern California, and contacts noted several large-scale construction projects in that region.

Financial Institutions
District banking contacts reported that overall demand for commercial and industrial loans improved slightly, particularly for loans to small businesses. Demand for commercial real estate loans picked up in several markets, and bank loan portfolios generally exhibited stable credit quality.