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Summary
Reports from contacts indicate that economic activity expanded at a solid pace in most areas of the District from mid-April through the beginning of June. Contacts noted further increases in the prices of gasoline and other commodities, but the pace of overall price inflation remained modest. Hiring activity picked up in many areas, but labor generally was in ample supply and upward pressure on wages and salaries was limited. Sales of automobiles, retail merchandise, and most types of services were quite strong, and contacts reported robust demand in the manufacturing sector. Sales of District agricultural and resource products were solid, especially for exported products. Activity remained vigorous in residential real estate markets, and further improvement was evident on the nonresidential side. Banks saw solid loan demand overall, with increases in commercial lending noted in some areas.
Prices and Wages
District contacts reported that the pace of price increases in the survey period was similar to the slightly increased rate established in the previous period. Rising prices for energy products and some raw materials, notably steel and lumber, raised transportation costs in general and production costs in selected industries. More generally, there were scattered reports of increased pricing power for retailers and service providers. The overall pace of price inflation remained modest, however, and most contacts expect little or no pickup in the pace of price increases over the balance of the year.
Ample labor availability kept wage and salary pressures limited throughout the District. Hiring activity picked up in many areas, with contacts in the construction, banking, manufacturing, retail, and services sectors reporting increases. Most new hires were for full-time, permanent positions, although temporary workers remained in demand, particularly in the retail and services sectors. Rising health insurance costs reportedly were the most significant source of increased compensation costs, even though many employers have been passing an increasing share of health costs on to their workers.
Retail Trade and Services
District contacts reported stronger retail sales than in the previous survey period. Automobile sales remained at high levels, sustained in part by generous financing incentives. Inventories of domestic autos remained high, however, and sales of sports utility vehicles and trucks slowed in the second half of the survey period, reportedly due in part to consumer concerns about rising fuel prices. A respondent from a major department store chain noted improved sales, and retail prices generally were stable, with less price discounting evident than in past survey periods.
Service providers saw solid demand throughout the District. Media and health-care service providers reported further improvements in sales, and one provider of high-tech services noted double-digit sales increases over last year. District travel and tourist activity strengthened further. Hawaii 's tourist traffic rose smartly, due to solid gains in domestic tourism and a sharp increase in visitors from Japan. However, respondents in some areas expressed concern that higher fuel prices could damp leisure travel this summer, especially to destinations that rely primarily on visits by automobile.
Manufacturing
District manufacturers saw further solid increases in production and sales across a wide range of products. Demand for semiconductors was very strong, keeping inventories low and further raising capacity utilization. Some makers of machine tools faced rising order backlogs due to rapid demand growth. Strong housing starts and rising demand for packaging materials fueled robust sales and firmer prices for wood panels, pulp, and paper. District apparel makers saw rising orders and inventories remained lean. The main exception to strong conditions was in the commercial aircraft sector, where orders remained somewhat weak and employment counts fell a bit further. More generally, rising demand has prompted some manufacturers to increase hiring, and a machine tool manufacturer in the Pacific Northwest noted growing difficulties finding qualified labor for available openings.
Agriculture and Resource-related Industries
District providers of agricultural and resource products reported generally solid demand. Sales were strong for beef cattle and fruits, nuts, and other types of produce; export growth was especially robust, boosted in part by continued weakness in the dollar relative to key foreign currencies. Prices increased sharply for dairy products; in contrast, potatoes were in abundant supply, and prices fell. Contacts in the resource sector noted rising demand for crude oil and natural gas; however, capacity expansion was constrained somewhat by delays in obtaining raw materials, notably steel.
Real Estate and Construction
Demand was vigorous in residential real estate markets, and conditions improved a bit further on the nonresidential side. Sales of new and existing homes were rapid throughout the District, achieving a near-record pace in Hawaii and Southern California, despite rising interest rates for home mortgages. Strong demand, particularly for less-expensive homes, has kept prices rising at a solid clip in most District markets, especially Southern California. On the commercial side, demand for office space improved a bit further in some areas, although rental rates remained largely flat. Respondents reported that shortages of some building materials, such as steel and cement, increased construction costs and caused construction delays in some cases.
Financial Institutions
District banking contacts reported strong loan demand and good credit quality. Commercial lending rose noticeably in several areas, and respondents noted healthy or improved credit quality. Demand for mortgages to finance home purchases remained strong, but refinancing activity plummeted in response to rising interest rates.
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Dallas