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Reports from Twelfth District contacts indicated that economic activity expanded at a moderate pace in most of the region in April and early May. With the exception of volatile energy prices, respondents reported little change in prices for most consumer goods and services. Moreover, slack labor market conditions worked to damp increases in wages. Consumers continued to spend at a steady pace, stimulated in part by discounting in the retail trade and service sectors. Conditions in District manufacturing generally improved further in the most recent survey period; contacts indicated improved conditions in high-tech manufacturing. However, most firms remained cautious about making technology investments. District agricultural producers noted some improvement in conditions in recent weeks. Commercial real estate markets continued to weaken, while demand for residential real estate remained fairly solid. Bank contacts reported acceptable levels of asset quality and some evidence of increased strength in loan demand.
Prices and Wages
District contacts reported little change in consumer prices in April and early May, with strong competition keeping final sales prices low for retail products. On balance, producers' input prices held steady. Respondents observed that labor markets remained tilted in favor of employers; there is ample labor supply and little upward pressure on wages and salaries in most areas. On the other hand, rising health care and other insurance costs continued to concern employers.
Retail Trade and Services
Respondents reported continued strength in consumer spending and stable conditions in retail trade and services. Many District contacts noted that new automobile sales were holding up well during the most recent survey period. Respondents also indicated that inventory levels for both new and used cars were adequate. Demand for major home appliances generally remained steady in the District, with sales driven in part by strong home sales and low interest rates. Respondents indicated that heavy discounting by vendors continued to stimulate the sale of software and high-tech services. Discounting also was noted in the retail and service sectors more generally.
The District travel and tourism sector, outside of Hawaii, continued to see steady gains during the survey period. Hotel occupancy rates have picked up slightly, and respondents in California, Hawaii, and Utah reported that advanced bookings point to further improvement in travel and tourism this summer.
Manufacturing
District contacts indicated further signs of improvement in the high-tech manufacturing sector in recent weeks. In the semiconductor industry respondents noted a pickup in new orders and sales, which helped many factories draw down inventories, to keep them in balance with sales and allowed for further increases in production levels. In contrast, respondents reported that the telecommunications industry remained weak as over-capacity and price wars led firms to downsize and lay off workers. The recession-like conditions in commercial aircraft manufacturing continued as new orders and final sales remained weak owing to excess capacity in the airline industry. Contacts in the Northwest reported that weakness in manufacturing continued to hold down overall economic performance.
Most contacts noted little evidence in the current survey period of changes in the pace of investment spending, especially in high-tech products. Respondents stated that firms generally planned to remain cautious about investment and expansion plans in the months ahead until a sustained upturn in earnings is evident.
Agriculture and Resource-related Industries
Respondents indicated that conditions in the agricultural sector improved slightly during April and early May. Nevertheless, increased input costs, such as higher fuel costs, have imposed some strain on agricultural producers. Respondents reported that demand for domestic forest products improved, as housing activity remained brisk and sanctions on selected foreign products limited supplies. Contacts also noted low prices for a number of agricultural products, most notably cotton and cattle; high levels of supply continued to depress cattle prices in recent weeks. Contacts in Arizona and California expressed concerns about the effects of summer drought conditions on the farm sector.
Real Estate and Construction
Disparate conditions in District real estate markets persisted in April and early May, with commercial markets remaining weak and most residential markets continuing to be strong. Respondents throughout the District indicated that commercial property vacancy rates rose slightly, while lease prices deteriorated since the last survey period. In the San Francisco office market, lease rates have retreated to 1998 levels. However, the pace of the vacancy increases and rent declines have slowed compared to the last survey period. Contacts reported little, if any, new commercial development, particularly in resort hotels and downtown and suburban office space. Construction costs for commercial buildings in some District areas continued to decline.
In contrast, demand for residential real estate in the District remained solid in most areas during the survey period. Contacts observed that residential construction activity in several areas continued to rise at a moderate pace. Respondents in several District states also noted that home prices continued to appreciate in the most recent survey period; reports indicated that Southern California had the most robust housing markets in the District.
Financial Institutions
District financial conditions showed signs of improvement from the previous survey period. Contacts reported that bank earnings and asset quality remained solid, despite some concerns that consumers may be overextended. Bankers in California also noted an increase in demand for loans and observed that Southern California banks were benefiting from the region's relatively strong economy.
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Dallas