Beige Book Report: San Francisco
April 11, 2012
Economic activity in the Twelfth District continued to expand at a moderate pace during the reporting period of late February through the end of March. Despite higher energy prices, overall price pressures for final goods and services remained modest, as did wage gains. Sales of retail items and demand for business and consumer services rose further. District manufacturing activity increased on net. Demand was robust for agricultural producers but remained uneven for providers of energy resources. Activity in District housing markets strengthened modestly but remained lackluster on balance, and demand for nonresidential real estate was largely unchanged. Contacts from financial institutions reported small increases in overall loan demand and slight improvements in credit quality and availability.
Wages and Prices
Price inflation for most final goods and services remained subdued during the reporting period, with the notable exception of gasoline. While contacts noted an increase in the prices of oil and selected other commodities, resulting cost increases generally were absorbed in profit margins rather than pass-through to final prices. Restaurant prices were an exception, with notable increases reported. Looking ahead, contacts in general expect prices for their products to hold largely stable or increase slightly during the second half of the year compared with the first half.
Upward wage pressures were quite modest overall, held down by high levels of unemployment and limited demand for new workers. However, wage gains remained pronounced for highly skilled workers in information technology fields, and significant gains were also reported for experienced workers in some segments of manufacturing. The reports suggested that wage gains are likely to remain limited going forward, as most contacts plan to engage in only modest hiring for the foreseeable future.
Retail Trade and Services
Retail sales continued to improve. Discount chains reported modest increases in sales, while traditional department stores noted stronger gains, particularly in the luxury segments of the market. Demand continued to improve for retailers of home furnishings and major appliances. By contrast, sales remained largely flat for grocers. Sales of new automobiles continued to strengthen, with high gas prices spurring especially strong growth for fuel-efficient vehicles. Similarly, demand for used vehicles remained robust.
Demand for business and consumer services strengthened further on balance. Sales continued to expand at a moderate pace for providers of technology services, and contacts anticipate growth will pick up in the second half of the year. Demand has improved in the radio and television broadcasting industries. By contrast, demand for professional services was largely flat, as was demand for health-care services. Sales activity was reported to be up somewhat for restaurants and other food-service providers. Activity in the District's travel and tourism industry picked up further, with contacts in Hawaii and Southern California noting ongoing gains in visitor volumes and hotel occupancy rates.
Manufacturing
District manufacturing activity rose a bit on net during the reporting period of late February through the end of March. Makers of commercial aircraft and parts saw limited new orders, but an extensive order backlog kept production rates near capacity. Manufacturers of semiconductors and other technology products reported some firming in new orders and indicated that they expect demand growth to pick up further in coming months. Capacity utilization rates continued to hold largely stable for petroleum refiners as weak domestic gasoline demand was offset by strong foreign demand for distillate products. Production activity was largely unchanged for metal fabricators, but demand remained quite depressed for producers of wood products. Food processors saw solid growth in orders and sales.
Agriculture and Resource-related Industries
Demand for agricultural products and mined metals remained strong, while extraction activity of natural resources used for energy production was uneven. Final sales and orders were robust for a broad range of crop and livestock products, and recent precipitation has eased concerns in parts of the District about drought during the upcoming growing season. Contacts noted increases in the costs of some inputs, such as fertilizer. Expanding activity in the mining sector continued to be supported by high prices for a variety of precious metals and metallic elements used for specialized industrial purposes. Mild winter weather continued to tamp down demand for natural gas, prompting additional declines in extraction activity, while elevated price levels and robust foreign demand spurred further increases in oil extraction.
Real Estate and Construction
District home demand improved slightly but remained weak on balance, and demand for commercial real estate was largely unchanged. Sales of new and existing homes continued to improve modestly in certain areas of the District, although the pace remained quite lackluster overall. Furthermore, despite relatively low interest rates, contacts noted that tight financing terms more generally held down the pace of sales. With inventories of available homes still very high, new construction activity stayed at depressed levels and home prices remained largely flat. Demand for commercial real estate continued to be weak overall, as reflected in elevated vacancy rates and limited leasing activity for office and industrial space in many parts of the District. On the other hand, growth in the technology sector has led to rapid absorption of commercial space in certain locales, such as the San Francisco Bay Area and Seattle. As a result, increased construction activity for new office space is expected for these areas over the next twelve months.
Financial Institutions
District banking contacts reported that overall loan demand rose modestly since the prior reporting period, and credit quality and availability improved slightly. While businesses generally remained highly cautious about their capital spending plans, the volume of new commercial and industrial loans edged up as businesses continued to pursue targeted investments geared towards increasing productivity. On the consumer side, demand for credit was largely unchanged. Credit quality improved slightly, with reports indicating a general decline in loan delinquencies. Although lending standards have remained relatively restrictive for most types of business and consumer loans, contacts reported modest improvement in overall credit availability. The reports also indicated that competition among lenders has been creating downward pressure on rates and fees for well-qualified small and medium-sized businesses.