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The Twelfth District's solid economic expansion continued during the survey period of early June through mid-July, but reports indicated that the pace of growth moderated somewhat. Wage and price inflation were limited on net, although wage growth remained rapid for selected worker groups with specialized skills. Growth in retail sales was modest, falling below some retailers' expectations, while demand for services remained robust. Manufacturers saw solid demand, as did producers of agricultural and resource-related products. Residential construction activity, sales, and price appreciation continued to soften in most areas, while activity in commercial real estate markets picked up further. District banks reported strong loan demand on net but slight slowing for some categories.
Wages and Prices
Contacts reported that upward pressure on prices was modest overall. Significant increases in final prices continued to be largely confined to products and services for which energy costs are a significant component, such as construction and transportation services. Some contacts reported increased pricing power for selected retail items and manufactured goods, while others noted that increases in input costs have moderated over the past few months.
District labor markets tightened a bit further. Wage increases were moderate overall, reportedly in the range of 3 to 4 percent on an annual basis, but they remained more rapid for workers with specialized skills in many sectors. Contacts in various sectors reported that employers increasingly relied on hiring bonuses and incentive packages to attract and retain qualified workers. Growth in employers' costs for employee benefits, particularly for health insurance, reportedly has subsided from the rapid pace reported in previous survey periods.
Retail Trade and Services
Retail sales grew modestly on net, reflecting slight weakening relative to the previous survey period. Sales held steady or grew slightly for department stores and various small retail establishments but reportedly were below some retailers' expectations. Demand for automobiles was mixed. High gas prices reportedly held down demand for large SUVs and light trucks, keeping inventories at very high levels, but sales of selected fuel-efficient imported vehicles remained strong.
Most service providers continued to see robust demand. Activity was brisk in the health-care services and professional services sectors. Providers of telecommunications and transportation services saw strong demand. Travel and tourist activity was robust in most major markets. In Hawaii, further increases in domestic tourist arrivals and spending more than offset a continued decline in visits by Japanese tourists. Hotel occupancy rates generally remained high and room rates rose further there and in other tourist destinations throughout the District.
Manufacturing
Demand for District manufactured products was solid on net during the survey period of early June through mid-July. Orders and sales of semiconductors were strong and inventories were balanced; capacity utilization has been running at or above 90 percent for many products, and the industry recently increased its 2006 sales forecast. Production activity for commercial aircraft remained vigorous in the Pacific Northwest, as further growth in orders and an existing backlog kept aircraft manufacturing establishments operating near full capacity. Contacts reported solid demand growth and balanced inventories for apparel and processed food. Conditions were mixed for manufacturers of building materials, with some seeing modest sales growth and others facing weaker demand due to recent declines in residential building activity.
Agriculture and Resource-related Industries
Demand for District agricultural and resource-related products was strong. Sales were robust for most crops, especially for organic products, and inventories generally were balanced. Prices received for some crops were high compared with last year, due in part to supply constraints caused by earlier excess moisture and cool weather in various parts of the District. Contacts reported that high costs for fuel and fertilizers remained a concern, putting upward pressure on final prices. In the resources sector, producers of oil and natural gas saw robust demand and little or no excess capacity, although one contact noted that inventories of natural gas remained high, causing prices to decline.
Real Estate and Construction
Activity in residential real estate markets continued to decelerate in most areas, while activity in commercial real estate markets expanded further. Contacts from Arizona, California, and Nevada reported that the pace of home sales and price appreciation moderated further. In the Pacific Northwest--where residential real estate markets had remained hot earlier this year--home sales reportedly softened and permits for new residential construction fell, with the exception of continued robust activity in the market for condominiums in downtown Seattle. Residential real estate markets also remained hot in most parts of Utah, especially in Salt Lake City. On the commercial side, office and retail vacancies fell further throughout the District, and rental rates have been rising steadily this year. Construction activity for commercial and public structures remained strong in most areas, largely offsetting slower home building. In some rapid growth areas such as Salt Lake City and parts of Oregon, builders continued to face significant cost increases due to tight supplies of skilled workers and selected construction materials.
Financial Institutions
District banking contacts reported strong loan demand on net but slight slowing for some categories. Commercial and industrial lending remained robust. By contrast, residential mortgage origination and refinancing activity slowed further, and some contacts noted slight weakening in demand for consumer loans. Scattered reports indicated slight erosion in credit quality for residential mortgages and consumer loans.
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Dallas