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Reports from Twelfth District contacts point to a deceleration in economic growth in May, with slowing evident in most sectors. Respondents reported less cost pressure on non-energy inputs, but noted that rising energy prices continued to damp profitability. Higher unemployment rates eased wage and salary growth in many areas of the District, but rising benefit costs remained a concern. Retailers and service providers in the District noted slower sales growth, particularly for big-ticket items such as cars and electronics and luxury services such as high-speed Internet access and wireless web phones. Higher energy prices and softening demand for high-tech goods continued to depress the District's manufacturing sector, with many firms reducing output and cutting jobs. Agricultural producers remained strapped by low commodity prices and higher input costs. Respondents noted increased weakness in residential and commercial real estate markets throughout the District in recent weeks, owing largely to the downturn in the technology sector and uncertainty about the economy. Credit conditions weakened slightly in May, as loan demand fell, delinquencies rose, and lenders tightened credit standards.
Wages and Prices
Twelfth District contacts reported falling prices on many non-energy inputs and consumer products. Intense competition and inventory overhang continued to depress prices for producer inputs and consumer durables. Electronics and apparel retailers reported considerable price discounting in an effort to clear out accumulated inventories. Appliance and automobile sellers also reported heavy discounting, particularly for top-of-the-line merchandise. In contrast, prices on most consumer non-durable goods remained stable or rose slightly as energy surcharges were applied.
Energy costs for businesses and consumers increased further in May, and additional rate hikes are expected in June. Respondents noted that higher energy costs increasingly are being passed on to consumers, typically in the form of energy surcharges. However, the price pass-throughs remained partial and higher energy costs continued to cut into profits. A dominant theme among respondents was their use of conservation measures to reduce energy costs. The most common conservation measures included lowering lighting and air conditioning during work hours and shutting off lights, computers, and monitors during off hours. Respondents noted that some businesses -- for example, restaurants, laundries, lumber and wood product makers, and food processors -- have cut back hours of operation to reduce energy costs.
Looser labor markets eased wage and salary pressures in many District states, although wage demands by entry-level workers remained high. In contrast, wages for mid-level employees and all but the best high-skilled workers stabilized, with many contacts reporting average wage increases of between zero and one percent this year. Rising benefit costs remained a concern for many District employers.
Retail Trade and Services
District retailers and service providers continued to report weaker-than-expected sales growth, particularly for big-ticket items and luxury services. Sales of automobiles, appliances, furniture, and consumer electronics such as entertainment systems and computers, fell short of projections in recent weeks and ran behind sales for the comparable period last year. Food and pharmaceutical sales continued to increase, but at a slower pace than earlier in the year. District service providers noted weaker demand for cable and Internet connections and wireless phone service, particularly for high-end packages including multiple hookups and wireless web access. Rising gasoline prices and consumer uncertainty appear to be restraining travel to the District's high-end tourist destinations. Tourist counts and revenues were down in Hawaii and Las Vegas and at destinations such as golf schools and luxury resorts in the Intermountain states and along the West coast.
Manufacturing
Conditions in the District's manufacturing sector weakened further in May. Orders for semiconductors continued to decline, boosting inventories, pushing prices and capacity utilization well below projections, and leading some producers to furlough employees and reduce work hours. Producers noted that a growing portion of inventory will be outdated before it can be sold. District producers of non-high-tech products such as lumber and wood products, aluminum, apparel, and processed foods continued to be hit hard by rising energy costs, falling export demand, and greater import competition. Producers in these sectors reportedly have exhausted their ability to improve productivity and pass costs on to buyers, making job cuts the only way to reduce costs.
Agriculture and Resource-Related Industries
District agricultural conditions remained weak. Low commodity prices and rising fuel costs continued to squeeze profit margins. Inventories of many products are building up and storage space is becoming constrained. Deteriorating weather conditions in the Intermountain states added to these concerns; drought-like conditions eliminated grazing opportunities and forced ranchers to purchase feed, boosting expenses. Oil and gas producers face better times, with drilling and investment growing at a rapid pace.
Real Estate and Construction
Residential and commercial real estate markets in the District remained sound in May, although increased signs of weakening were noted in most regions. Contacts reported softening in residential real estate markets, with the most pronounced slowing in the hottest markets -- the San Francisco Bay Area, Phoenix, and Seattle -- and in the market for high-end homes. Respondents noted that home buyers and sellers seem to be in a holding pattern, waiting for the market to stabilize. The slowdown was not limited to home sales; contacts in many areas of the District reported rising apartment vacancy rates and falling lease rates. Contacts in the San Francisco Bay Area noted that landlords have begun to offer special lease deals and reduced lease rates to attract residents.
Commercial real estate markets also saw increased vacancy rates and falling lease rates. The collapse of the dot-com sector as well as ongoing downsizing among high-tech manufacturers and software companies has put a large amount of sublease space on the market, particularly in the San Francisco Bay Area and Seattle. General slowing in the economy has increased vacancies in Portland and Salt Lake City. Construction is responding to the change in market conditions. Respondents noted that a number of large long-term projects have been put on hold until the market stabilizes.
Financial Institutions
District financial institutions reported additional weakening in credit conditions in May. A number of contacts reported that profitability among firms with outstanding loans has become a concern among lenders. Increased loan delinquencies were reported in many areas of the District in May and lenders noted a tightening of credit standards. Small business loan demand fell in recent weeks, as borrowers became more cautious about expanding.
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Dallas