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The Twelfth District economy expanded at a solid pace during the survey period of March through mid-April. Contacts reported modest wage and price inflation on net, although wage growth remained rapid for selected worker groups with specialized skills in some industries. Retail sales rose, owing in part to a rebound in auto sales, and demand for services was strong. Output and sales grew significantly in most manufacturing sectors and for producers of agricultural and resource-related products. Residential construction, sales activity, and price appreciation slowed slightly in most areas, while the demand for commercial real estate grew further. District banks reported strong loan demand on net and very good credit quality.
Wages and Prices
Contacts reported that upward price pressures were modest overall. Prices for energy-intensive products and selected building materials were at high levels but generally held steady or fell somewhat relative to recent survey periods. Final prices for most goods and services reportedly rose at a modest pace, or in the case of information technology products and services continued to decline, owing to domestic and international competition and ongoing productivity gains.
Overall wage increases remained moderate on net, with numerical reports for broad worker groups in the range of 3 to 4 percent on an annual basis. However, availability remained tight and wage increases remained relatively rapid for some groups of workers with specialized skills, notably in the financial, construction, health-care services, information technology, and professional services sectors. Contacts also noted that employers' costs for employee benefits, particularly for health insurance, continued to rise more rapidly than wages.
Retail Trade and Services
District retail sales grew at a solid pace in most areas during the survey period. "Big-box" retailers of home improvement products and services reported robust orders and sales, while sales of toys and other small retail items grew at a more modest pace. Demand for new and used automobiles bounced back and was stronger than expected during the survey period, with improved sales of domestic makes and continued strength in sales of imported vehicles.
Activity in the services sector generally was vibrant, with some exceptions. Demand remained strong in the health-care services, professional services, and transportation sectors, while conditions were mixed for providers of information technology and media services. District travel and tourist activity expanded further from very high levels, although contacts in Hawaii and California noted that hotel occupancies have been leveling off. Contacts also noted general growth in demand for air travel and improved financial performance by major carriers.
Manufacturing
District manufacturers reported significant growth in output and sales during the survey period of March through mid-April. Orders and sales of semiconductors were strong and industry-wide capacity utilization remained very high; inventories increased slightly but remained near target levels. Production of commercial aircraft continued at a rapid pace in the Pacific Northwest, and orders for new aircraft remained strong. Machine tool makers saw further increases in demand and reportedly have been operating at close to full capacity. Food processors also saw demand growth. In contrast, sales were slightly disappointing for District apparel manufacturers, and excess capacity remains in that sector. More generally, contacts noted that capacity utilization has been rising in most manufacturing sectors, but worldwide competitive pressures have been restraining pricing power.
Agriculture and Resource-related Industries
Demand grew significantly for District agricultural and resource-related products. Sales were robust for most crops and livestock; demand for beef cattle softened slightly but prices received by ranchers remained at very high levels. Contacts noted some supply constraints, including continued high prices for fuel and fertilizer, tight markets for agricultural labor, and unusually wet weather that delayed planting and field work in parts of California. In the resource sector, producers of oil and natural gas continued to see robust demand and little or no excess capacity.
Real Estate and Construction
Activity in residential real estate markets was at high levels but showed signs of further moderation in most areas, while demand for commercial real estate continued to expand. Home sales and construction activity were at high levels overall. However, these and other measures of market conditions, such as the pace of price appreciation and time on the market, suggested significant cooling in most areas. The main exceptions were Utah and parts of the Pacific Northwest, where activity remained robust. On the commercial side, office and retail vacancy rates fell and rental rates rose further in most major markets. Overall construction activity remained at high levels, reflecting an extensive array of residential, commercial, and large public projects in most areas. Several contacts reported that builders continued to face cost increases and minor project delays as a result of tight availability of skilled workers and selected materials such as steel, cement, and lumber.
Financial Institutions
District banking contacts reported strong loan demand on net. The volume of commercial and industrial lending rose, while mortgage lending, particularly in subprime categories, fell somewhat from very high levels. One contact noted that compression of profit margins resulting from intense competition and narrow interest spreads has been offset in part by "excellent" asset quality. Venture capital financing has risen in some areas, and one Silicon Valley institution with venture capital interests noted plans to expand employment significantly this year.
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Dallas