WASHINGTON (MNI) – The following is the text of the San Francisco
section of the Federal Reserve’s Beige Book report on current financial
conditions released Wednesday:

TWELFTH DISTRICT-SAN FRANCISCO

Summary

Economic activity in the Twelfth District grew at a moderate pace
during the reporting period of September through early October. Upward
price pressures were mixed but remained modest overall, and upward wage
pressures were limited to a narrow set of skilled occupations. Sales of
retail items rose, as did demand for business and consumer services.
District manufacturing activity improved modestly. Agricultural
producers reported further sales gains, and demand rose a bit for
providers of energy resources. Home sales and construction remained
lackluster, and demand for commercial real estate stayed weak in most
markets. District banking contacts indicated that overall loan demand
was largely unchanged.

Wages and Prices

Overall price inflation for final goods and services was modest
during the reporting period. Contacts noted additional price declines
for energy inputs, particularly oil, but slight upticks in the costs of
assorted raw materials. The combination of weak final demand and robust
competition by firms continued to hold down final prices for a wide
range of goods and services. Contacts in most sectors reported that
upward wage pressures were nearly nonexistent, held down by limited
demand for new hires and high levels of unemployment. However, wage
gains remained pronounced for narrow worker groups with specialized
skills, particularly in information technology fields. The reports
suggested that wage gains are likely to remain muted for the foreseeable
future, as most businesses do not expect to engage in significant hiring
over the balance of 2011, except for normal seasonal needs.

Retail Trade and Services

Retail sales expanded overall. Despite contact reports of
deteriorating consumer sentiment, sales improved for both traditional
department stores and discount chains alike. By contrast, sales were
largely flat for grocers and retailers of major appliances, furniture,
and electronics. Sales of new automobiles improved substantially, as
demand growth was met by restocked inventories for some brands that had
struggled with shortages resulting from the natural disaster in Japan
earlier this year. In response to the surge in demand for new autos, the
demand for used vehicles weakened somewhat and their prices softened.
Despite recent gains, contacts expect that overall consumer spending in
the final months of the year will be little changed from the same period
last year. Demand for business and consumer services was mixed but
appeared to improve on balance. Energy utilities reported further
increases in demand from businesses and households. Sales continued to
expand for providers of technology services, although the pace of growth
has slowed from reporting periods earlier in the year. Demand was
largely flat for providers of professional services such as legal
services and accounting and also for health care. Providers of
transportation services reported slightly slower activity. Conditions in
the District’s travel and tourism industry were mixed: contacts in
Hawaii noted a slight decline in visitor volumes, while contacts in
other major markets, such as San Diego and Las Vegas, noted further
improvements in visitor counts and hotel occupancy rates.

Manufacturing

Manufacturing activity in the District showed modest gains on
balance during the reporting period of September through early October.
Makers of commercial aircraft and parts reported ongoing growth in new
orders, which combined with an existing backlog to keep production rates
near capacity. Apparel makers noted an increase in new orders, and
production activity grew for food manufacturers. Manufacturers of
semiconductors and other technology products reported further moderation
in the pace of growth for new orders and sales, although capacity
utilization rates stayed quite high. Capacity utilization rates also
remained largely stable for petroleum refiners, despite increased
distillate demand, as they strived to reduce elevated product
inventories. Demand remained feeble for manufacturers of wood products
used for construction, and this was accompanied by recent signs of
weakness in the pulp and paper sector, which had reported growth earlier
this year.

Agriculture and Resource-related Industries

Demand continued to expand for agricultural products, and activity
overall improved somewhat for metal miners and extractors of natural
resources used for energy production. Final sales and orders rose
further for assorted crops and livestock products, and reports indicated
little change in the cost and availability of inputs. High price levels
for assorted metals continued to boost production and investment in the
District’s mining sector. Extraction activity for natural gas was little
changed from the prior period, while overall demand for crude oil
improved somewhat as a result of rising foreign demand, particularly
from emerging-market economies.

Real Estate and Construction

District home demand remained quite weak, and demand for commercial
real estate was largely unchanged. The pace of home sales stayed
sluggish throughout the District. The large number of distressed
properties kept inventories of available homes high, putting downward
pressure on prices and the pace of new home construction. In response to
weak home demand, however, demand for residential rentals continued to
improve, spurring expanded construction of multifamily units in some
areas. Demand for commercial real estate was generally weak, as
reflected in elevated vacancy rates for office and industrial space in
most parts of the District. Furthermore, contacts noted a renewed sense
of caution on the part of some business tenants and consequent
reluctance to commit to long-term leases. On the other hand, conditions
continued to improve for some major District markets, with rising
investor demand for well-leased office buildings further boosting
property values.

Financial Institutions

District banking contacts reported that loan demand was little
changed from the prior reporting period. Businesses in general remained
highly cautious in regard to their capital spending plans, citing
recently elevated levels of uncertainty about the direction of the
economy. As a result, demand for commercial and industrial loans was
largely flat, although some contacts noted that competition among
lenders to extend credit to well-qualified small and medium-sized
businesses continued to intensify, placing further downward pressure on
rates and fees. Demand for consumer credit was characterized as stable.
Lending standards remained relatively restrictive for most types of
business and consumer loans.

** Market News International Washington Bureau: 202-371-2121 **

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