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Reports from Beige Book contacts indicate favorable economic conditions among 12th District states in the final months of 1997 and suggest a positive, although more tempered, outlook among respondents for 1998. Retailers reported that holiday sales, though stronger than last year, were lower than expected, prompting considerable post-season discounting. Respondents throughout the service sector reported healthy gains in recent weeks, and shipping and trucking contacts noted easing of recent bottlenecks associated with the Union Pacific Railroad merger. Manufacturers reported healthy activity, but noted declines in exports to East Asian countries. Developments in East Asia also have reduced demand for many District agricultural products. Steady demand for commercial real estate kept construction activity strong in most of the District, despite a slowdown in many housing markets. District financial conditions remained healthy, and competition for quality borrowers continued to be intense.
Business Sentiment
District respondents expect solid performance of the national economy and their respective regional economies. Most respondents expect national GDP growth to slow to its long-run average pace, leaving the national unemployment rate near its current level. A majority of respondents expect inflation to remain constant over the next 12 months, although a growing fraction anticipate a slight decline in inflation. With regard to regional conditions, over three-quarters of the respondents expect growth in their area to outpace national growth in the coming year. Recent disruptions in East Asia have affected export expectations in the District�more than 80 percent of District respondents expect a decline in foreign exports from their regions.
Retail Trade and Services
Respondents in most areas of the District characterized holiday retail sales as better than last year but lower than expected. High-end gifts, such as jewelry and branded apparel, reportedly posted the strongest sales, requiring little pre-Christmas discounting to attract buyers. In contrast, retail contacts reported disappointing sales of inexpensive and moderately priced clothing and personal electronic items, despite early heavy discounting. Overall, slower than expected holiday sales, particularly at department stores and discount chains, reportedly have left many retailers with unwanted inventories that are being cleared away through deep price cuts.
Service industry respondents in most of the District reported good gains during the recent survey period. Respondents from Northern California and the Pacific Northwest reported healthy demand for business services, including consulting and advertising. Tourism-related airport traffic and hotel occupancy rates increased in several areas of the District. In Portland, air passenger traffic reportedly was at record levels. In San Diego, hotel occupancy rates reportedly reached a decade high over the past few months. The news was not as good in Utah and Hawaii. In Utah, a lack of snow has slowed the flow of ski-bound tourists; in Hawaii, recent developments in East Asia have significantly depressed East-bound visitor traffic, prompting many airlines to reduce the number of scheduled flights to the state. Port traffic throughout the District reportedly was strong. Inbound traffic from East Asia has offset declines in outbound vessels carrying products to East Asia. Respondents in the shipping industry also indicated that the bottlenecks associated with the Union Pacific Railroad have subsided slightly in recent weeks.
Manufacturing
District manufacturing reports generally were positive, although contacts noted that
developments in East Asia have reduced exports and tempered growth in some areas and industries. In the Pacific Northwest, food processors and lumber and wood product manufacturers reportedly have experienced substantial declines in exports to East Asia, prompting some companies to postpone expansion plans until the region stabilizes. Boeing also has felt the effects of East Asia; public statements from Boeing indicate a slowdown in the growth of aircraft orders and requests for delivery delays from East Asian countries. However, given the backlog of orders at Boeing, no decline in production is expected this year. In other areas of the District, contacts reported declines in shipments of primary and secondary metals to East Asian countries and slowing of orders for telecommunications equipment.
Agriculture and Resource-Related Industries
Reports on District agricultural conditions and resource-related industries were mixed. Falling gold prices resulted in the recent shut down of operations at a number of District mines. The cattle industry was beset by herd losses due to unfavorable weather and grazing conditions, particularly in the Intermountain states. Demand for many agricultural commodities slowed in recent weeks as East Asian countries either cancelled orders or failed to secure appropriate lines of credit for purchase. On the bright side, reports indicate that the Union Pacific railway problems have begun to ease, clearing the way for delivery of inputs that are necessary for the next growing cycle.
Real Estate and Construction
Commercial real estate activity continued to increase in most areas of the District, keeping District construction activity at high levels despite a slowdown in many housing markets. Respondents in many areas of the District outside of California noted declines in new housing
starts and slowing sales of both new and existing homes. However, commercial real estate and construction activity in these areas remains strong and has kept demand high for contractors, subcontractors, and materials.
Financial Institutions
Twelfth District banking conditions continued to be healthy. Respondents reported that bank capital and liquidity were in ample supply and competition for loans remained intense, with quality borrowers receiving excellent terms and rates. Respondents noted that low interest rates are boosting loan demand and encouraging refinancing on all types of real estate. Throughout the industry, shortages of qualified workers continued to be a primary concern, and wage and salary pressures remained high.
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Dallas