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The Twelfth District economy expanded solidly in October and early November,
maintaining the pace of growth of the previous survey period. In terms of inflation,
retailers reported stable prices despite increasing costs and makers of IT products
noted ongoing price declines for many of their goods and services. Other contacts
continued to comment on the higher cost of energy, shipping, and building materials.
Wage increases remained modest, but rising benefits costs continued to push
up total compensation. Retail sales reportedly were solid and demand for District
services remained strong. District manufacturing activity was mixed, with some
sectors reporting solid growth and others noting some softening. District agricultural
producers reported strong demand for most products. Activity in District residential
real estate markets generally was robust, with slight moderation in some areas.
Contacts indicated modest improvements in commercial real estate; office and
industrial vacancy rates fell slightly in several markets. District banking
and financial conditions were little changed, with solid overall loan demand
and good credit quality.
Prices and Wages
In terms of inflation, District retailers reported stable final prices despite
rising costs for wholesale merchandise and shipping; retailers noted that they
continue to hold the line on prices, taking cost increases out of margins. Makers
of IT products reported additional price declines for some of their goods and
services. Consistent with softer IT investment, price declines for some types
of semiconductors reportedly accelerated. Several other contacts noted increases
in transportation costs--land, sea, and air--and some reported paying surcharges
on international shipping. Respondents continued to comment on the higher costs
of energy and building materials. Wage and salary growth remained modest overall,
although most District businesses continued to report that increases in benefits
costs were pushing up total compensation bills.
Retail Trade and Services
Reports from District retailers indicated solid retail sales in October and
early November. Recent sales have boosted expectations for the coming holiday
season. Despite a relatively good holiday sales outlook, contacts reportedly
are keeping inventories and seasonal hiring in line with last year. In contrast
to other retail goods, sales of autos slowed somewhat, reflecting soft demand
for domestic brands; sales of foreign makes remained solid. Slower sales of
domestic makes reportedly left some District auto dealers with unplanned inventory.
Contacts reported robust demand for District services. District seaports continued
to handle very high volumes, boosted by surging imports and a pickup in exports.
The volume of traffic, especially on the import side, has caused considerable
congestion, resulting in a backlog of unloaded inbound ships in southern California.
Contacts reported that shipping lines recently increased their prices for ground
and sea transport in response to the bottlenecks. District travel and tourism
also has been vigorous, with increases in both domestic and international traffic.
Contacts noted improvements in hotel occupancy and increases in average daily
room rates in many markets.
Manufacturing
Conditions in District manufacturing were mixed across industries in October
and early November. Makers of machine tools reported a pickup in new orders
for their products, allowing them to work down previously accumulated inventories.
Improved sales of lumber, wood, and other building products boosted production
in that sector. Demand for apparel and textile products was robust in recent
weeks. In IT manufacturing, semiconductor orders and sales were flat; inventories
of chips increased and capacity utilization dropped slightly. Respondents at
IT firms other than semiconductors noted that demand softened relative to earlier
in the year.
Agriculture and Resource-related Industries
District agricultural producers reported strong domestic and foreign demand
for most agricultural products. Agricultural exports continued to rise. District
natural gas providers reported a slight rise in both wholesale and retail prices.
The high and rising natural gas prices have kept drilling activity at full capacity.
Real Estate and Construction
Demand for residential real estate generally remained strong, although in some
areas the pace of home sales and price increases slowed slightly from previous
rapid rates. On the commercial side, contacts indicated modest improvements;
office and industrial vacancy rates edged down in several markets. The robust
demand for homes, improved demand for commercial properties, and some increased
public spending kept overall construction activity at high levels. Contacts
noted that the supply of some construction materials, such as steel, improved,
but other building materials, such as cement, continued to be in short supply.
Financial Institutions
District banking contacts reported little change in overall loan demand or credit
quality in recent weeks. Construction lending remained strong and commercial
and industrial lending edged up slightly in some areas. Residential mortgage
lending continued to soften, pulled down by a drop in refinancing activity,
but remained at high levels. Contacts reported that loan quality remained good.
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