WASHINGTON (MNI) – The following is the text 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 continued to grow at a
moderate pace during the reporting period of January through
mid-February. Price increases for final goods and services were limited,
and upward wage pressures were minimal. Sales of retail items rose on
balance, and demand improved modestly for business and consumer
services. District manufacturing was mixed but appeared to expand
overall. Demand grew further for agricultural producers but was uneven
for providers of energy resources. Activity in District housing markets
remained sluggish, and demand for nonresidential real estate stayed weak
overall. Financial institutions reported a small increase in overall
loan demand.

Wages and Prices

Upward price pressures remained very limited during the reporting
period. While price increases were reported for some commodities,
including oil and assorted construction materials such as cement and
wallboard, declines were noted for others, such as natural gas. Price
increases for most goods and services continued to be restrained by weak
final demand and stiff competition among businesses. Upward wage
pressures were quite modest, as high levels of unemployment and limited
demand for new workers kept a lid on compensation gains. However,
contacts continued to point to notable increases in the costs of
employee benefits, particularly in regard to defined benefit pension
plans, although they reported slight easing in upward pressures on
health benefit costs. Consistent with prior periods, upward wage
pressures remained pronounced for workers with specialized skills in the
application of information technology in assorted sectors.

Retail Trade and Services

Retail sales continued to expand. Modest improvements in sales were
reported for general merchandise such as apparel and smaller household
items, with stronger gains noted for traditional department stores than
for discount chains. Demand also improved modestly for retailers of
major appliances and furniture, but it remained lackluster for
electronics. Sales held relatively stable for grocers, although upscale
chains saw gains. For retailers of pet products, demand continued to
show robust growth.

Demand for business and consumer services rose a bit on net. Sales
grew further for providers of technology services to businesses and
consumers. Similarly, demand for professional services such as legal
services and accounting ticked up on balance. For providers of
health-care services, demand was largely stable, with declines in
inpatient admissions and surgeries offset by higher emergency room
visits. Sales activity was reported to be largely unchanged for
restaurants and other food-service providers. Conditions in the
District’s travel and tourism industry continued to strengthen,
reflecting growth in both the business and tourism segments of the
market.

Manufacturing

Manufacturing activity in the District was mixed but appeared to
expand further during the reporting period of January through
mid-February. Manufacturers of semiconductors and other technology
products reported moderate sales gains; reports of ongoing investments
in information technology equipment by firms in most sectors suggest
that demand growth is likely to continue for these manufacturers. For
makers of commercial aircraft and parts, strong demand for narrow-body
aircraft along with an extensive order backlog kept production rates
near capacity. Activity was essentially flat for metal fabricators, and
slack demand combined with a diminishing backlog have raised concerns
that production activity may decline going forward. Capacity utilization
rates for petroleum refiners held largely stable as robust global demand
for distillate products, especially from Latin America, continued to
offset weak domestic demand for gasoline. Output and sales of wood
products remained extremely weak.

Agriculture and Resource-related Industries

Demand continued to improve for agricultural products and mined
metals, but it was mixed for natural resources used for energy
production. Orders and final sales grew further for most crops and
livestock products, with little or no change indicated for the cost and
availability of inputs. Mining activity in parts of the District
expanded further for a variety of precious metals and metallic elements
used for specialized industrial purposes. Strong foreign demand for oil
prompted additional increases in extraction activity. By contrast, warm
weather held down demand for natural gas relative to seasonal norms,
causing further declines in recent and planned extraction activity.

Real Estate and Construction

Home demand in the District persisted at very low levels, and
conditions were little changed for commercial real estate. The sales
pace for new and existing homes remained quite subdued, although
scattered reports suggested modest improvement. Inventories of available
homes stayed quite high, putting continued downward pressure on prices
and construction activity. By contrast, demand for rental space remained
robust, prompting further increases in construction of multifamily
units. Conditions in commercial real estate markets were largely
unchanged, and vacancy rates for office and industrial space stayed high
in most parts of the District. However, additional declines in vacancy
rates were noted for selected geographic areas such as the San Francisco
Bay Area and Seattle. Contacts also noted recent improvement in
financing availability and investor activity for well-leased office
buildings.

Financial Institutions

Reports from District banking and business contacts indicated that
loan demand improved a bit overall compared with the prior reporting
period. The volume of new commercial and industrial loans edged up. The
reports suggested that businesses generally remained very cautious in
regard to capital spending decisions, but many continued to invest in
information technology equipment aimed at enhancing productivity.
Moreover, many businesses expect to modestly increase their capital
spending in the first half of the year compared with the second half of
last year, suggesting that growth in business loan demand may continue.
The reports also noted continued stiff competition among lenders to
extend credit to well-qualified small and medium-sized businesses,
placing further downward pressure on loan rates and fees. Strong recent
financial performance by technology companies backed by venture capital
reportedly has spurred further investments of late. On the consumer
side, the reports suggested little change in loan demand. Contacts
reported slight improvement in overall credit availability, although
lending standards remained relatively restrictive for many types of
business and consumer loans.

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

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