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Economic activity in the Twelfth District continued to expand at a moderate
pace on net during the survey period of October through mid-November. Reduced
energy prices reversed upward price pressures for some products, while the pace
of wage growth remained contained overall but exerted upward price pressures
in some industries and areas. District retailers generally reported improved
sales and service providers saw strong demand. Orders and output grew further
for most manufacturers and agricultural producers. District housing markets
continued to cool, while demand for commercial real estate expanded but at a
slower pace than previously. Banks reported solid loan demand and good credit
quality in general.
Wages and Prices
Upward price pressures diminished somewhat, as prices for energy and related
products receded from previously high levels, reducing overall production costs
in some sectors. Prices fell further for selected building materials used primarily
for residential construction. More generally, respondents noted relatively stable
input prices. The primary exceptions were selected commodities such as flour
and sugar: significant price increases of late for these inputs are expected
to show up in the final prices of some food products in early 2007.
Overall wage growth remained moderate. However, wage growth continued to be
more rapid for selected groups of skilled workers, notably in the health-care,
finance, and construction sectors, and in areas with very tight labor markets
overall, such as Idaho and Utah. Scattered reports also suggested employers
were becoming increasingly reliant on using hiring bonuses to recruit skilled
workers who are in short supply. These compensation increases exerted noticeable
upward pressure on final prices in some cases.
Retail Trade and Services
District retailers reported improved sales growth and balanced inventories for
items other than motor vehicles. Sales at department stores and specialty shops
picked up relative to the previous survey period, spurred in part by increased
spending power arising from lower gasoline prices. Considering early sales figures,
retailers are cautiously optimistic in their forecasts for the holiday season
as a whole, with expected sales growth generally in the range of 4 to 6 percent
relative to last year. Demand for automobiles weakened slightly compared with
the previous survey period. Sales of fuel-efficient import vehicles continued
at a solid but slightly reduced pace, while the recent drop in fuel prices did
little to offset sluggish sales for large, fuel-inefficient domestic models;
inventories of domestic light trucks and SUVs reportedly were at record highs.
Service providers reported generally strong demand. Sales grew significantly
in the food and beverage, health-care, and transportation sectors. Contacts
in various sectors reported that fuel surcharges have been trimmed due to lower
energy costs, reducing the price of transportation services. Overall tourist
activity remained at high levels, although a Southern California contact noted
that recent convention business there has not kept pace with last year.
Demand for District manufactured products expanded further in October and early
November. Sales of semiconductors grew at a solid pace in line with industry
forecasts, and capacity utilization generally remained in the range of 90 percent.
Producers of commercial aircraft and their parts suppliers continued to operate
at full capacity to meet ongoing order backlogs, while makers of machine tools
indicated that new orders grew but at a slightly reduced pace. Food manufacturers
reported continued strong sales. By contrast, demand for selected building materials
used primarily for home building fell further, and some sawmills in the Pacific
Northwest have sharply curtailed production or closed due to reduced demand
for wood products.
Agriculture and Resource-related Industries
Demand for District agricultural and resource-related products was strong and
production conditions were stable overall. Sales rose for livestock and most
crops, and prices received for these items increased compared with a year ago,
notably for selected commodities such as corn. Prices for fertilizers and freight
services have fallen significantly, easing upward pressures on production costs.
In the resources sector, producers of oil and natural gas continued to see robust
demand, although one contact reported that demand for natural gas slowed somewhat
due to reduced sales of new homes.
Real Estate and Construction
Activity in residential real estate markets fell further, while demand for commercial
real estate expanded but at a slower pace than previously in some areas. The
pace of home sales and price appreciation continued to slow for existing and
new homes, with particularly weak conditions noted for the latter. To work down
unsold inventory, home builders have been offering significant incentives to
entice buyers; these incentives reportedly have been valued as high as 10 percent
of the listed prices. Residential construction activity has fallen substantially
along with demand for homes. On the nonresidential side, vacancy rates for commercial
space fell further and rents rose a bit in most areas. Construction activity
for commercial and public projects continued to expand, largely offsetting the
decline in residential construction, although the pace of growth was slower
than earlier in the year. Some contacts noted that investors and builders have
grown more cautious about committing to nonresidential projects, due in part
to the high costs of land, labor, and building materials.
District banking contacts reported solid loan demand and good credit quality
overall. Further growth in commercial and industrial loans continued to offset
declines in residential mortgage originations. Demand for consumer loans fell
slightly in some areas but remained relatively strong. Credit quality was high
in general with few delinquencies. However, contacts provided scattered reports
of delinquencies on loans to home builders, and banks have increased their vigilance
over these loans. Venture capital and private equity financing reportedly remained
on a modest but steady growth path.