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The Twelfth District economy expanded at a solid pace from mid-April through
the beginning of June, with slight moderation evident in some sectors. Wage
and price inflation reportedly were modest on net, although wage growth remained
rapid for selected worker groups with specialized skills. Retail sales expanded
somewhat and demand for services was strong. Demand for District manufactured
products grew overall but fell for some construction materials. Producers of
agricultural and resource-related products saw solid demand. Residential construction,
sales activity, and price appreciation softened further, while demand for commercial
real estate continued to expand. District banks reported strong loan demand
on net but further easing in mortgage demand; credit quality remained very high.
Wages and Prices
Contacts reported little or no change from the modest upward pressure on prices
noted in the previous survey period. Significant increases in final prices were
largely confined to products and services for which energy costs are a significant
component, such as construction and transportation services. More generally,
contacts reported that vigorous competition and ongoing productivity gains sharply
limited their ability to pass rising input costs on to final prices, although
they provided scattered reports of increased pricing power for some retail items.
District labor markets tightened a bit further during the survey period. Upward
wage pressures were moderate overall, but wage increases remained rapid for
workers with specialized skills in the construction, health-care, information
technology, and financial services sectors. More generally, contacts reported
healthy hiring activity, although the pace of hiring has slowed in parts of
California.
Retail Trade and Services
Retail sales grew modestly during the survey period. Demand for domestic automobiles
reportedly improved in recent weeks, although sales remained below year-earlier
levels as high gas prices held down demand for large SUVs and light trucks.
By contrast, sales of selected fuel-efficient imported vehicles reportedly remained
at record highs. Sales of apparel and other small retail items expanded, although
performance varied substantially across retailers.
Most service providers saw robust demand. Activity was brisk in the health-care
services, professional services, and transportation sectors. Sales and hiring
activity grew further for providers of technology services, although the employment
outlook in this sector was clouded slightly by a report of reduced use of temporary
employees. District travel and tourist activity was vigorous. In Hawaii, substantial
increases in domestic tourist arrivals and spending offset recent declines in
Japanese tourist activity relative to year-earlier levels. For major District
tourist destinations in general, hotel occupancy rates remained high and room
rates rose further.
Manufacturing
Demand for District manufactured products grew further on net. Orders and sales
of semiconductors continued to expand, and capacity utilization generally hovered
at or above 90 percent. Orders for commercial aircraft grew further and production
continued at a rapid pace in the Pacific Northwest, keeping aircraft manufacturing
establishments and their subcontractors operating near full capacity. Demand
for processed food grew further and demand for apparel picked up, with balanced
inventories reported in both sectors. In contrast, demand declined and prices
fell slightly for building supplies commonly used for residential construction
purposes, most notably wood products.
Agriculture and Resource-related Industries
Demand for District agricultural and resource-related products was strong during
the survey period of mid-April through the beginning of June. Sales remained
robust for most crops and livestock; inventories were balanced in general and
prices were stable to down slightly, despite supply constraints imposed by continued
drought conditions in Arizona and earlier excess moisture in California. Contacts
reported that the cost of fuel and fertilizers increased further from high levels,
although the rate of increase abated. In the resources sector, producers of
oil and natural gas saw robust demand and operated at close to full capacity,
although one contact noted that inventories of natural gas are very high, putting
downward pressure on prices.
Real Estate and Construction
Activity in residential real estate markets continued to decelerate, while demand
for commercial real estate picked up further. The pace of sales and price appreciation,
along with other indicators such as time on the market, point to significant
cooling in residential real estate markets in most areas; the exceptions are
Utah and parts of the Pacific Northwest, where housing markets reportedly remain
hot. On the commercial side, office and retail vacancy rates fell and rental
rates rose further in most major markets. Overall construction activity was
at high levels, with rising activity for commercial and public structures offsetting
declines for residential construction projects in some areas. Contacts reported
that some 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 and cement.
Financial Institutions
District banking contacts reported robust demand in most loan categories, with
the exception of declining demand for residential mortgages. Commercial and
industrial lending continued to grow steadily, and asset quality remained excellent.
Originations for new residential mortgages fell, but contacts reported that
home refinancing activity was brisk in some areas, as borrowers switched from
variable to fixed terms in the face of rising interest rates.
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