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Reports from contacts pointed to more modest growth in the Twelfth District economy in recent weeks and some easing of conditions in tight labor markets. Respondents reported moderate to weak retail sales so far in 2001 and mixed trends in manufacturing. The farm sector continued to be characterized by low product prices and high costs. Real estate and construction activity generally remained strong, although ongoing dot-com cutbacks have increased availability in commercial office markets in California and Washington. District respondents noted that credit markets have experienced moderate tightening in recent weeks.
Wages and Prices
Contacts indicated that the District's labor market conditions eased somewhat in recent weeks, although they remained tight in most of the large metropolitan areas. Respondents noted several factors that have contributed to the easing, including layoffs in the high-tech, Internet, and energy sectors and slower growth in labor demand in financial services. Many contacts indicated that signing bonuses and special compensation packages were either smaller or no longer necessary to attract qualified workers. Still, bonuses continued to be offered for some skilled positions such as engineers, pharmacists, construction workers, and financial service workers. Clerical, retail, and entry-level positions also remain tight in some markets.
Respondents cited a slowdown in labor market turnover and some easing of pressures on wages as evidence that labor market conditions have loosened to some extent. However, several contacts indicated that benefits costs continued to climb at double-digit rates. Respondents noted that, in general, increased wages, benefits, and most material costs could not be passed along to consumers. One exception appears to be energy costs. Several contacts in the services and manufacturing sectors noted that higher fuel and energy prices are being passed on; surcharges on goods and services, including hikes in charges for freight deliveries and hotel rooms, have become more common in recent weeks.
Retail Trade and Services
District contacts reported moderate to weak retail sales so far this year, despite increased discounting. One indicator of softening is the weaker vehicle sales reported in Idaho and Utah, where spending by consumers on big-ticket items became more cautious and demand shifted to lower-priced vehicles. Slower sales growth rates and declining consumer confidence have caused retailers and manufacturers to increase their emphasis on controlling inventories for goods ranging from apparel to computers. One dimension of the District economy that has held up is tourism. Respondents in California and Hawaii noted that the travel and hotel industries continued to perform well, with the latter reporting high occupancy levels and rising room rates.
The District manufacturing sector, including its important high-tech component, has shown mixed strength in recent months. Recent food and beverage industry sales compared favorably with 2000. Biotech and pharmaceuticals firms continued to add jobs in recent weeks, as did aerospace firms, which also reported no capacity constraints. Investment in information systems infrastructure continued to rise, and shortages of raw materials for fiber optics and data communications (DSL) persisted. However, some contacts reported slower sales growth and postponed investments in high-tech capital equipment. Cell phone sales growth was slower than expected. The growth in sales of semiconductors used in consumer products is expected to slow in the first part of 2001. Rising inventories were noted for semiconductors, computers, telecommunications equipment, and vehicles. Manufacturers' concerns about the high cost of energy were reported in California, the Pacific Northwest, and the Intermountain states, but production disruptions have been limited.
Agriculture and Resource-Related Industries
District farmers continued to face low product prices and high costs. Commodity prices remained low, while the cost of fertilizers and insecticides rose. In addition, while some other sectors have been able to pass on high energy costs, contacts indicated that farmers cannot do so. In contrast to the weakness in the farm sector, District ranchers continued to benefit from high cattle prices and stable feed costs.
Real Estate and Construction
Real estate and construction activity remained at high levels in District states; however, increasing signs of softening in commercial real estate markets were reported. Dot-com cutbacks have increased the available supply of office space in California and Washington. Respondents noted that leasing activity in Washington had slowed dramatically in recent weeks and that rents have fallen from high levels. Strength in residential housing was reported, especially in Hawaii, although housing sales levels and appreciation rates have slowed across much of the District. Respondents cited no shortages of labor and materials for construction.
Most District contacts reported tighter credit market conditions in 2001. Contacts indicated that financial institutions have become more concerned about loan quality, with many tightening their credit standards. Respondents cited more stringent cash flow requirements for financing commercial real estate and for high-tech firms, less funding for speculative real estate projects, and more difficulty in obtaining agricultural credit. Venture capital funding also has dropped off in the District. Regarding the demand for credit, several respondents indicated that the demand for business credit to finance capital spending and expansion plans has fallen this year. On the other hand, there were indications of continued strength in the demand for asset-based loans.