Beige Book Report: San Francisco
August 29, 2012
Economic activity in the Twelfth District continued to expand at a modest pace during the reporting period of July through mid-August. Price inflation was limited for most final goods and services, and upward wage pressures were quite contained. Sales of retail items rose a bit further on net, and demand for most business and consumer services continued to expand. District manufacturing activity appeared to inch up on balance. Agricultural output expanded, while activity continued to trend up for providers of energy resources. Home demand in the District strengthened a bit further, and demand for commercial real estate was largely stable. Contacts from financial institutions reported that overall loan demand was unchanged or weakened slightly on balance.
Wages and Prices
Price inflation was limited for most final goods and services during the reporting period. Prices increased for some energy items, mainly crude oil, retail gasoline, and electricity, but natural gas prices remained near historic lows. Contacts also noted price increases for assorted food commodities, particularly grains, although meat prices reportedly have leveled off for the time being. For most products and services, vigorous competition among firms and cost-conscious purchasing behavior by consumers kept price inflation in check.
Upward wage pressures were quite limited overall. Wage increases were noted for employees in some manufacturing sectors where wages had been flat for several years; the reported increases were moderate, in the 2 to 3 percent range. Wage gains also remained significant for workers with specialized skills in the application of information technology. Contacts in general reported very limited hiring plans for the balance of the year, suggesting that upward wage pressures will remain muted.
Retail Trade and Services
Retail sales expanded a bit further overall. Respondents in general indicated that sales strengthened somewhat in July compared with softness in May and June. Performance was stronger for discount chains than traditional department stores, particularly for online sales. At grocery stores, extensive bargain hunting by shoppers caused sales revenues to weaken a bit. The pace of auto sales slowed somewhat compared with the prior reporting period, although it remained significantly above the pace from the same period last year. Used vehicles have been in short supply, raising their trade-in values and helping to spur sales of new vehicles.
Demand for most business and consumer services expanded further. Sales continued to grow for a wide variety of technology services, with expectations for further rapid growth in selected segments, such as cloud computing services. Advertising revenues remained at high levels for radio and television broadcasters in the District, but the slow drift of television production activities away from District locales such as Los Angeles continued. Providers of health-care services noted a drop in the demand for discretionary medical services and a consequent reduction in capacity utilization at medical care facilities. Demand picked up further for restaurants and other food-service providers. Contacts in the District's travel and tourism sector reported additional gains for business and leisure travel, although the pace of growth has slowed of late in some areas such as Las Vegas.
Manufacturing
District manufacturing activity was mixed but appeared to inch up on balance during the reporting period of July through mid-August. Production activity remained at high levels for makers of commercial aircraft and parts. Demand continued to grow for pharmaceutical manufacturers. Output and sales strengthened a bit further for manufacturers of wood products. By contrast, the slowdown continued for makers of information technology equipment, with sales declines reported for some equipment categories in recent months. Demand for steel was mostly stable at low levels, while sales of processed scrap metal fell, largely as a result of a decline in overseas demand. For petroleum refiners, capacity utilization rates increased somewhat, as growth in export sales for a range of refined products offset weakness in domestic demand for gasoline.
Agriculture and Resource-related Industries
Agricultural producers saw further sales gains, and extraction activity of natural resources used for energy production continued to expand. Orders and sales grew for many crop and livestock products, and one report indicated that demand for cotton was particularly strong. The persistent drought in parts of the country has raised grain and feed prices, prompting District cattle ranchers to reduce herd sizes. Extraction activity for petroleum and natural gas remained at high levels or expanded a bit further on net, although some producers have been shifting operations away from natural gas in response to continued high inventories and the consequent low price.
Real Estate and Construction
Home demand in the District continued to improve, while demand for commercial real estate was largely stable. Although it is still well below its historical average, the sales pace for new and existing homes picked up further in many areas, and some contacts pointed to pent-up demand that may spur additional gains. Contacts also reported that the share of foreclosures and short sales in overall home sales has been declining, and the quality of the inventory of available homes has improved. In some parts of the District, a shortage of lower-priced homes and rental units has led to an ongoing increase in construction activity, particularly for multifamily rental projects. Demand for nonresidential space was largely stable overall, with construction activity largely limited to various public projects and remodeling of commercial and industrial space.
Financial Institutions
District banking contacts reported that loan demand was unchanged or down slightly on balance compared with the prior reporting period. Business loan demand appeared to drop a bit, amid growing reluctance by many firms to commit to expansion plans under current economic conditions. At the same time, the reports continued to highlight ample liquidity and stiff competition among lenders to provide credit to well-qualified business loan applicants. Demand for consumer credit remained relatively strong, reflected primarily in high lending activity for automobile and home purchases.