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Twelfth District contacts reported strong economic performance in the most recent survey period, with evidence of tightening capacity constraints in several sectors. Manufacturing activity expanded further in the District, with aerospace and related products leading the way, although demand growth slowed for some other products. Service providers continued to do very well, and demand conditions and inventories in retail trade generally were acceptable. Residential and commercial real estate markets were active and healthy in most areas. However, widespread shortages of skilled labor continued, and several respondents noted emerging difficulties in filling entry level jobs. Despite tight supply lines for some intermediate products, upward pressure on final prices of goods and services was tempered by robust competition.
Business Sentiment
The bulk of District respondents expect national economic growth to remain on track at about a 2 percent annual rate in the near term, leaving the national unemployment rate at low levels. Among respondents anticipating a change in national growth and unemployment over the next 12 months, very few expect deterioration. In contrast, although most respondents expect a continuation of the existing national inflation rate, nearly 40 percent predict an increase. Spurred by expectations of increasing business investment, housing starts, consumer spending, and exports in the Twelfth District, the overwhelming majority of respondents continue to expect the pace of economic growth in their regions to exceed the national rate.
Retail Trade and Services
Most District contacts in the retail trade sector reported adequate demand and sales. A large retailer of food and drug products in several states reported moderate sales with healthy inventories, and limited price increases overall. Sales of new and used cars have weakened in some areas, although this was offset slightly by rising sales of light trucks. In the Pacific Northwest, respondents from the clothing and sporting goods industries reported average sales and inventories that were slightly higher than planned. Several respondents noted shortages of both skilled and entry level workers.
Conditions in District service industries remained top-notch. Demand for telephone and cable television services was strong. Investment in high-tech capital equipment has been rapid in most service industries in the District, although some respondents noted that high levels of spending in the past and current factors such as industry restructuring have served to moderate growth of expenditures on new computer equipment. Hotel occupancy was high and room rates rose in the coastal Pacific Northwest and in Utah's Salt Lake City area. Other reported service prices, such as those for electricity and cable television, remained relatively stable.
Manufacturing
District manufacturing activity expanded further in recent weeks, and tightening capacity constraints were noted by various respondents. Increased aircraft production at Boeing's Seattle facilities continued to spur demand in other District industries and areas. In Southern California, a respondent in the metals industry reported aluminum mill capacity at 90-95 percent, with prices escalating for certain materials in short supply. Demand for machine tools reportedly grew but at a slower rate than earlier, with growth focused mainly in the export market. Also, a maker of high-tech products noted manufacturing capacity constraints for some computer components and slowed demand growth for cellular phones. Reports of difficulty finding skilled workers continued to be widespread.
Agriculture and Resource-related Industries
Generally healthy conditions were reported in the District agricultural sector. Conditions in the cattle industry improved substantially in recent months due to a combination of growing demand for cattle and reduced grain prices. Conditions for agricultural producers in Idaho were reported to be good overall, with the notable exception of weak demand for the state's key crop, the potato. Respondents also noted weak demand and low prices for District seafood products.
Real Estate and Construction
Real estate markets and construction activity remained strong in most areas of the District. California real estate markets firmed further. In the San Francisco Bay Area, home prices have increased substantially, and the inventory of homes for sale is minimal in certain desirable locations. Improvement has spread to Southern California, where housing permits increased and prices have shown signs of recovery. Respondents also noted ongoing strengthening in California's commercial real estate market.
Increasing construction costs due to rising materials prices and a shortage of skilled construction labor reportedly contributed to home price appreciation in many areas of the District. In the Portland, Oregon area, demand for new homes is strong and land costs have risen substantially. Although housing starts have slowed in Utah, increased nonresidential construction reportedly has put pressure on already tight markets for construction labor.
Financial Institutions
District financial institutions reported strong loan demand and generally favorable banking conditions throughout the District. In Southern California, where economic activity has been weaker than elsewhere in the District, a recent increase in banking activity was reported. Stiff competition and ongoing efficiency-driven consolidation continue to characterize much of the District's banking industry.
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Dallas