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Reports from Twelfth District contacts indicated a pickup in economic activity in January and early February. Respondents reported steady prices for most consumer goods and services and little pressure on wages. Consumer spending reportedly exceeded expectations in recent weeks and travel spending improved slightly, but sales remained below year-earlier values for both retailers and travel-related businesses. Demand for high-tech manufactured goods reportedly strengthened further in January and February, with contacts noting improvements in both sales and orders. District agricultural producers reported little change in conditions in recent weeks. Demand for low-to-medium priced residential real estate remained fairly strong, although slightly weaker than in previous months. In contrast, commercial real estate markets continued to weaken. Bank contacts reported a drop-off in borrowing in response to greater economic uncertainty and stricter loan terms.
Prices and Wages
District contacts reported little change in consumer prices in the recent survey period but noted some downward pressure on input costs, especially energy. Falling input prices reportedly helped boost profit margins in a number of sectors. Ongoing weakness in labor markets further eased wage and salary pressures in the District during the most recent survey period. Wage increases were scant across sectors, and some contacts noted that some firms have suspended bonus programs until the economy improves.
Retail Trade and Services
District respondents reported better-than-expected retail sales in January and early February. Still, nominal sales growth reportedly remains flat to negative relative to a year earlier. Contacts reported that retail inventories generally were in balance but that many retail outlets were cutting jobs to bring staffing in line with current requirements. Automobile sales slowed considerably relative to the fourth quarter of 2001 as many zero percent financing programs came to an end.
Respondents in the services sector noted that the demand for professional services such as financial counseling, advertising, and public relations fell in recent weeks. In contrast, demand for communications services reportedly improved in January and February. Travel and tourism also picked up slightly, although demand remained well below year-earlier levels, creating excess capacity at hotels, rental car agencies, airlines, and cruise ships.
Manufacturing
District contacts noted further signs of stabilization in the high-tech manufacturing sector, with improvements in new orders and sales and continued success in drawing down inventories. Despite these positives, high-tech manufacturing contacts reported that firms continued to reduce employment.
Outside the high-tech sector, respondents reported little improvement, with falling orders and excess capacity continuing to depress output and earnings. Weakness was especially apparent in the District's aerospace sector, where the impact of reduced demand for air travel is beginning to show through to employment at aircraft and parts manufacturers. Numerous manufacturing contacts reported that the strong dollar and weak foreign economies continued to damp export demand for manufactured goods.
Agriculture and Resource-Related Industries
District agricultural conditions reportedly changed little from the previous survey period, with excess supply and low prices characterizing markets for most products. On a positive note, cattle farmers and growers of field crops worked down inventories, and saw improvements in prices. The long period of low prices reportedly has prompted producers of some products to engage in supply control programs. For example, prune growers reportedly have taken measures to reduce supply and stabilize prices. Several respondents noted that in the context of the strong dollar, there was increased competition from new global market players in South America, Northern Europe, and China. Lastly, respondents in the energy sector noted that warmer than normal weather has depressed demand for heating oil and natural gas and slowed growth in the fuel transportation business.
Real Estate and Construction
Conditions in real estate have remained mixed so far this year, with commercial markets weakening further and residential markets remaining stable. Respondents throughout the District noted further increases in vacancy rates and declines in lease rates for commercial property in recent weeks. Accordingly, construction on ongoing and new commercial projects slowed substantially, with many builders pausing until the economy improves.
In contrast, residential real estate markets in the District remained solid. Respondents noted that sales of low-to-median priced homes were strong, with many listed properties receiving multiple offers. In California, markets in the San Francisco Bay Area improved in January and February adding to ongoing strength in Southern California and the Central Valley. Across the District, the market for high-end homes remained weak, with sales and prices declining relative to the previous survey period.
Financial Institutions
District contacts reported that loan demand continued to fall on net in January and early February. Contacts noted that some of the drop-off in borrowing likely was due to the uncertain economic environment, while stricter borrowing requirements have priced some businesses out of the market. Respondents noted that consumer loans were more readily available with respect to price and loan terms than were business loans.
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Dallas