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Reports from Twelfth District contacts indicate continued solid expansion in most industries in the recent survey period, although there were signs of moderation in some sectors. District retailers reported moderate sales volumes and modest sales growth, while service providers noted continued strong demand for most products. Manufacturers reported solid sales growth overall, boosted by strong demand for a variety of high-tech products. Agricultural producers reported mixed conditions with weak demand and low prices for District farmers and strong demand and firm prices for District ranchers. Commercial and residential real estate markets remained solid in most District states. Throughout the District, employees at all skill levels remained in short supply, creating notable upward pressure on wages. However, apart from fuel and energy, contacts noted that wholesale and retail prices remained stable.
Wages and Prices
Labor markets remain tight in most District states. Contacts reported stiff recruitment competition and high turnover rates for both skilled and unskilled workers. Wages and benefit costs continued to rise. Employers noted that while hiring and recruitment bonuses remain prevalent, recent stock market volatility has tempered the use of stock options by Internet-related firms. As for prices, energy and petroleum-based product prices have increased, affecting input costs for firms in many sectors and raising home heating bills. Reports indicate that the strong exchange value of the dollar and associated import competition continue to keep wholesale and retail prices in check.
Retail Trade and Services
District retailers reported moderate sales volumes and slower sales growth in the recent survey period. Respondents in California, the Pacific Northwest, and the Intermountain states reported flat or slowing grocery store and apparel sales. Transportation strikes reportedly tempered retail sales in some parts of Los Angeles. District contacts reported that merchandise is readily obtainable, with wholesale distributors offering discounts to retailers in order to clear away excess inventories.
Conditions among District service providers remained strong in recent weeks; however, there were signs of slowing among Internet service providers, as concerns about profitability and financing resulted in job cuts and business restructuring, particularly in the Pacific Northwest. Demand for freight transportation remained brisk; in California, port traffic surged with notable increases in shipments to China. In the tourism sector, growth in visitor traffic to Hawaii boosted hotel occupancy rates and room prices. In contrast, in Salt Lake City, hotel occupancy rates continued to decline, due largely to increases in capacity. The addition of capacity among movie theater chains has pushed occupancy rates down and begun to temper profits, despite strong growth in ticket sales.
District manufacturers reported solid sales, as strong domestic demand for some goods offset weakening demand for other goods. Contacts at aerospace, semiconductor, and pharmaceutical manufacturing firms reported strong sales growth. Electronics producers noted that component costs declined, and apparel manufacturers reported reduced material costs, largely due to declining import prices. Contacts noted that recent weakness in the euro has reduced European orders for machine tools and equipment produced in the District. Lumber exports from the Pacific Northwest also fell in recent weeks.
Agriculture and Resource-related Industries
Conditions for District agricultural producers were mixed during the most recent survey period. With the exception of cotton, avocados, and some nuts, District producers reported low prices for agricultural commodities and tree crops. In response to declining prices, some California growers have reduced production of annual vegetable crops. In contrast, demand growth and strong prices for cotton have encouraged growers to expand planting acreage. District ranchers reported continued strong demand for beef and firm prices, making the ongoing drought in the Southwest the main constraint on profits. Rising oil prices and a shortage of diesel fuel reportedly have increased packaging and shipping costs in the agriculture sector.
District energy producers reported continued expansion of production; however, material and labor shortages have restrained growth. Contacts reported difficulty obtaining pipe, gas turbines, and access to land. Demand for geologists, engineers, and rig crews is strong, and experienced workers are in short supply.
Real Estate and Construction
The pace of home sales was brisk in most District states during the survey period, although some moderation was reported in the Pacific Northwest. Contacts in California, Washington, Arizona, and Hawaii reported strong home sales and continued price appreciation. Declining inventories of existing homes and apartments have fueled construction in the Intermountain states and Hawaii. Rising home prices in the San Francisco Bay Area reportedly have begun to spill over to surrounding areas; contacts noted a pickup in activity in residential real estate markets in Sacramento and other parts of California's Central Valley. In the state of Washington, contacts reported that the pace of price appreciation slowed in recent weeks, as declines in the value of employee stock options tempered sales of high-end homes.
Commercial real estate and construction activity remained strong in most District states, with the exception of Oregon. Industrial and office vacancy rates declined throughout California, pushing lease rates up in most areas. Vacancies remain at all time lows in the San Francisco Bay Area and have come down considerably in downtown Los Angeles. While Washington's commercial real estate market remains tight, office vacancy rates reportedly inched up recently, due in part to declining demand from Internet-related firms.
District financial institutions continued to report healthy deposit growth, generally good credit quality, but with some tightening of credit conditions for commercial real estate lending. Deposit growth and loan demand remained strong in Washington. Credit quality reportedly improved in Hawaii, while some credit deterioration was noted in Arizona. Contacts in California and Washington noted reduced credit availability for commercial real estate loans.