May 2, 2001 Federal Reserve Districts Twelfth District - San Francisco

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Twelfth District contacts reported continued expansion of the District economy in March and early April, although increased evidence of slowing was observed. Respondents noted less pressure on costs for many non-energy inputs, along with sharp declines in prices for semiconductors. District retailers continue to record weaker than projected sales and noted resistance of consumers to price increases. The energy situation remains critical in the West--respondents expressed concern about escalating energy prices and the threat of supply disruptions in coming months. Higher energy prices have affected production at a few energy-intensive businesses, adding to the more general weakening in the manufacturing sector. Investment spending is being curtailed in most sectors, with the notable exception of the energy sectors. Respondents indicated that commercial real estate is showing signs of softening in markets with concentrations of high-tech manufacturing and Internet services. The agricultural sector continues to be hurt by low prices and an inability to pass along higher energy costs. District respondents noted that the demand for credit has fallen slightly and credit standards have tightened. Wages and Prices Twelfth District contacts generally reported stable to weaker prices for many non-energy inputs and consumer products. Reports on labor costs were somewhat mixed. A number of contacts indicated that wages and prices were stable, while others noted continued upward pressure on wages and especially on benefit costs. Energy costs for businesses and consumers are up sharply, and recently approved electricity rate hikes will push prices up further in coming months. Since the last survey, respondents reported more frequent examples of higher energy costs being passed along to consumers. The increases often were in the form of energy surcharges added to prices of manufactured goods, charges for freight, and bills for services, including hotel accommodations. In contrast, contacts noted that suppliers of agricultural goods and wood products are not able to pass along higher energy costs to consumers. Respondents reported increased conservation efforts to limit the impact of higher energy prices on overall costs. A small number of contacts either have added or plan to add backup generators to minimize the cost of potential disruptions. Retail Trade and Services District retailers continued to experience weak sales in March and early April. Sales at many retailers fell short of projections and ran behind sales for the comparable period last year. Automobile dealers in Idaho are concerned about high inventory levels and sales that dropped below those for the comparable period last year. Retail food and drug sales were increasing more slowly in March and early April than earlier in the year. District contacts reported that Southern California tourist traffic continued to increase in recent months, although some signs of slowing are evident elsewhere in the region. Respondents from Hawaii noted a slight decline in year-to-date visitor days through February; the softening was attributed to slowing in the national economy and weakening in Asia. Respondents from Las Vegas reported disappointing gaming revenue figures for February. Manufacturing District manufacturing conditions have weakened since the last survey, though strength in commercial aviation remained a bright spot. Respondents reported that orders for semiconductors were off sharply. Since the beginning of the year, semiconductor prices have fallen more than 20 percent and capacity utilization has dropped dramatically. New orders for computers and communications and Internet infrastructure equipment are very weak. Respondents noted that producers in energy intensive sectors, such as aluminum smelters and mills in the Pacific Northwest, are expected to face further curtailments of production in the face of rising energy prices. More generally, there is concern about the threat of energy supply disruptions in coming months. Most respondents noted that supply disruptions would affect production much more than higher energy prices. District contacts indicated a widespread slowing this year in the pace of business investment spending due to excess capacity and inventories as well as less profit potential in a slowing economy. A number of businesses plan to reduce the growth in spending, while others are cutting their capital investment budgets. Respondents said that many businesses were cutting back expenditures on computers, information processing equipment, and software. Reductions were described as significant or substantial by some respondents. On the other hand, high energy prices are expected to spur investment in oil and natural gas exportation, energy transmission, and electricity generation. Agriculture and Resource-Related Industries Twelfth District agricultural conditions remain weak. Ranchers are now being squeezed by falling cattle prices. Contacts noted that higher energy costs have driven up costs for some food processors. Higher energy costs also may lead to reductions in acreage planted for irrigated crops. Producers in the agricultural sector also are cutting back investment spending. Real Estate and Construction Commercial real estate conditions in the District generally remain sound, though softening was noted in some regions. Contacts reported that commercial real estate market conditions in the Los Angeles area, Idaho, Hawaii, and Alaska generally remained strong as of early April. Respondents, however, pointed to rising vacancy rates and falling rental rates in the San Francisco Bay Area and the Pacific Northwest. Contacts cited increased availability of subleased office space following the rash of dot-com closings and downsizings as a key factor in the softening of conditions in these markets. In San Francisco, rents are down significantly from recent peaks but remain above year-end 1999 rates. Residential housing market conditions roughly reflect the pattern evident in the commercial sector. Respondents indicated that some regions were exhibiting some signs of moderation in March. Contacts noted that apartment vacancy rates were rising and rents were falling in the San Francisco Bay Area. A slowdown in residential sales also was recorded in the state of Washington. On the other hand, Hawaii continued to show strength in most residential markets. Financial Institutions District financial institutions reported that credit conditions continued to weaken. Contacts indicated that bank loan growth has moderated as lenders have tightened standards and borrowers have become more cautious. Respondents were split on their assessment of recent changes in asset quality, some identifying slight deterioration while others found little evidence of weakening. Return to top Dallas Full report