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Reports from contacts indicated strong economic conditions in the Twelfth District during the most recent survey period. Retailers reported solid sales growth, while service providers in the District noted a pickup in growth above an already rapid pace. Manufacturing activity picked up in much of the District, although import competition continued to temper growth in some sectors. Conditions among many agricultural producers in the District deteriorated in recent weeks, as poor weather, low prices, and weak demand challenged profitability. Strong residential and commercial real estate demand continued to fuel construction activity in much of the District, reportedly producing material and labor shortages in several states. Financial conditions remained favorable throughout the District, and competition for quality borrowers intensified.
District respondents expect continued strong performance in the U.S. economy, with regional growth outpacing the national rate. Nearly all respondents expect national GDP growth to equal or exceed its long-run average pace, leaving the national rate of unemployment at or below its current level. Respondents remained concerned about inflation; about one-half of District contacts expect inflation to increase in coming quarters. Nearly all respondents expect economic growth in their region to outpace growth in the national economy over the next year. Respondents were particularly optimistic about the strength of business investment and consumer spending in their areas. In contrast to earlier in the year, more than one-half of District respondents expect the region's foreign trade balance to improve in coming quarters.
Retail Trade and Services
Retailers in most District states reported solid sales growth in recent weeks. The strongest reports were from California and the Intermountain states, where rapid sales of apparel, food, and automobiles were noted. Contacts in the Pacific Northwest reported slower growth in retail sales than in previous weeks, largely due to flat sales of food and apparel. Overall, District retailers reported adequate inventory levels and few problems obtaining merchandise from suppliers. Retailers throughout the District noted that stiff competition and falling import prices have kept retail prices down, despite healthy consumer demand and rising labor and occupancy costs.
Service industry respondents in most District states continued to report robust growth. In California and the Pacific Northwest, sales of telecommunications and media services remained high, boosted by surging demand for internet and cable access. Respondents from California and Nevada reported brisk demand for tourism-related services; in contrast, Hawaii's tourism sector remained weak in recent months, tempered by further declines in East Asian visitor traffic. Strong import growth and a pickup in exports kept port traffic at high levels in recent weeks, reportedly pushing shipping and container prices up throughout the District. High gasoline prices reportedly have affected prices for ground freight; one contact reported that some transportation vendors have begun to index shipping contracts to gasoline prices.
Reports on District manufacturing activity generally were positive, although some sectors remained weak. Contacts noted that modest increases in East Asian demand, particularly from South Korea, have boosted sales among manufacturers of high-tech products, particularly computers and telecommunications equipment. Producers of lumber and wood products also reported robust demand, fueled by a strong domestic construction market and a resurgence of export demand. In California, some apparel manufacturers noted that solid demand for finished goods and low input prices for imported fabrics have improved conditions in their industry. On the down side, commercial aircraft orders remained at low levels. Manufacturers of steel, steel products, and machine tools also reported weak conditions, primarily owing to intense competition from low-priced imports.
Agriculture and Resource-related Industries
District agricultural producers reported mixed conditions in recent weeks, with additional deterioration in some sectors. Weak global demand for U.S. products, low prices, and poor weather have combined to limit the profitability of farmers throughout the District. Growers of grain and potatoes have been particularly hard hit. In contrast, conditions for ranchers, particularly of cattle, reportedly improved in recent weeks, boosted by increased demand for beef and falling feed grain prices. Despite improved conditions, contacts noted that profitability in the cattle industry remains below its 10-year average, inducing some small ranchers to exit the market. Respondents throughout the District also reported significant difficulties obtaining seasonal agricultural workers. District energy producers reported improved conditions in recent weeks.
Real Estate and Construction
District construction activity remained at high levels in most areas, with robust demand for non-residential real estate largely offsetting slowing in many housing markets. Respondents in many areas of the District outside of California noted declines in new housing starts and slowing sales of new and existing homes. However, commercial real estate and construction activity in these areas remains strong and has kept demand high for contractors, subcontractors, and materials. Respondents from California, Oregon, Washington, and Idaho noted that shortages of building materials, such as drywall and lumber, and skilled labor have begun to delay completion deadlines and increase project costs in some cases.
Twelfth District banking conditions remained favorable in recent weeks. Respondents reported that bank capital and liquidity were ample, and competition for loans remained intense, with quality borrowers receiving excellent terms and rates. Although competition has kept margins thin, contacts reported that year-to-date profits have met expectations. District contacts indicated that overall consumer and commercial credit quality remained stable in recent weeks, although a slight deterioration in the quality of automobile loans was noted.