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Reports from Beige Book contacts indicate a moderate pace of economic growth in most 12th District states during this survey period. Retailers reported modest sales growth in recent months, while service providers in the District noted an acceleration in growth above an already rapid trend. Manufacturing activity slowed further in recent weeks, damped by declining demand for exports and inventory imbalances in the high-tech sector. District agricultural conditions remained weak, as below average yields, low quality harvests, and soft prices continued to depress profits. Residential and commercial real estate activity was healthy, although higher financing costs have tempered growth. District banks reported increased demand for loans, as borrowers searched for alternative financing tools. Looking forward, respondents remain concerned about future financial and economic developments, although their view has improved since the last survey period.
Business Sentiment
Most District respondents expect the national economy and their respective regional economies to slow during the next four quarters. About two-thirds of the respondents expect U.S. GDP growth to fall below its long-run average pace, easing pressure in labor markets and pushing the national unemployment rate above its current level. Most respondents expect inflation to remain stable, although a growing proportion anticipate an increase in inflation in coming quarters. About one-half of District respondents expect economic growth in their region to be at or below the national pace over the next year; the remaining half expect their region to outperform the nation, although to a lesser degree than in previous years. Most respondents anticipate further slowing in business investment and consumer spending in their areas, and more than 95 percent of District respondents anticipate further deterioration in their region's foreign trade balance. Although respondents remain concerned about future financial and economic developments, their outlook has improved since the last survey period.
Retail Trade and Services
Overall, District respondents reported modest growth in retail sales during this survey period. Consumers reportedly remained cautious, searching for bargains and delaying purchases of more expensive items. Sales growth reportedly was strongest at "big box" retailers, which used discounting, merchandise give-aways, and contests to attract customers. Department store sales were flat or declining relative to last year in many areas of the District, but respondents noted that the Thanksgiving weekend is no longer considered a reliable barometer of holiday sales outcomes. Respondents indicated that apart from toys, home furnishings such as linens and decorative items were the fastest sellers. In contrast, apparel sales, particularly of outerwear and sweaters, were flat.
Service industry respondents in most District states reported strong growth. Demand for telecommunications, data communications, and cable television services picked up in recent weeks, producing material shortages and delaying deliveries in some regions. However, prices for most telecommunications and cable products remained stable due to stiff competition among providers. Demand for shipping and freight services also increased in many District states, as producers and retailers prepared for the holiday season. Strong import growth during the recent survey period kept port traffic at high levels throughout the District and pushed inbound cargo charges up significantly; two contacts reported that container rates for inbound cargo have risen by as much as 50 percent in the last year.
Manufacturing
Reports on District manufacturing activity were mixed. Respondents noted that industries dependent on export demand continued to slow in recent weeks, with employment contracting in some regions. In contrast, conditions among manufacturers of products targeted at domestic markets remained stable. However, a number of respondents noted that import competition has begun to push down final goods prices, depress order growth, and narrow profit margins in almost all sectors of manufacturing. District respondents reported few problems obtaining materials and limited capacity constraints; overcapacity, rather than constrained production, has become a concern of many District manufacturers. In a change from previous survey periods, District manufacturers did not report difficulty finding skilled employees.
Agriculture and Resource-Related Industries
District respondents reported that agricultural conditions remained weak during this survey period. Low prices and high inventories continued to squeeze profits for grain producers, while below average yields and poor quality harvests have left many growers of fruits, nuts, and vegetables in the red for the year, despite slight increases in prices. One contact noted that a number of apple orchards in the Pacific Northwest went unpicked this year because prices were too low to cover production costs. Feedlot conditions reportedly improved in recent weeks, although contacts noted that the slight improvement will not make up for weak conditions earlier in the year.
Real Estate and Construction
Real estate construction and sales activity remained at high levels in most District states, although the pace of growth reportedly slowed, particularly for commercial properties. Contacts throughout the District noted that rents for commercial properties have stabilized in most markets, damping new construction. Higher financing costs and the slowing economy reportedly have delayed construction of a number of new hotels and resorts in the District. Residential construction remained strong in many parts of the District, although respondents noted that speculative building has slowed substantially.
Financial Institutions
Twelfth District financial conditions were strong in recent weeks, although borrowers faced tighter terms. Commercial loan demand at banks remained high, and banking contacts reported ample capital to meet borrowers' needs. However, concerns about credit quality reportedly have restrained bank lending, resulting in higher terms and rates for commercial borrowers. Agricultural lenders noted that weak conditions for farmers and ranchers have begun to decrease the quality of their agricultural loan portfolios. On the consumer side, lower interest rates kept demand for mortgages and auto loans at high levels.
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Dallas