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Reports from contacts indicate strong performance from the Twelfth District economy in recent weeks. Sales of retail merchandise and services were robust in most areas of the District. Responses suggest a slight acceleration in District manufacturing activity, although demand in key sectors continues to be hampered by adverse trade conditions. District agricultural producers were hindered by weak export demand and poor weather. Conditions in real estate markets and the market for bank credit were robust overall, although slower real estate and construction activity was evident in some states. Upward price pressures were limited overall.
Business Sentiment
District respondents were optimistic about the expected performance of the national economy and their respective regional economies during the next four quarters. Virtually all of the respondents expect growth in national GDP to equal or exceed its long-run average pace. Slightly over half expect unemployment and inflation to remain unchanged, although about 40 percent expect these measures to rise. About half of the respondents expect better growth performance in their regions than in the nation as a whole; this percentage is up a bit from last fall. Moreover, the percentage of respondents expecting deterioration in their region's outlook for foreign trade has fallen substantially since last fall, although it remains slightly above one-half.
Retail Trade and Services
Sales of retail merchandise and services were rapid. Unit sales of retail merchandise were high in most areas, with substantial discounting reported; specialty retailers did particularly well. Sales of new automobiles and light trucks were vigorous, picking up in late February following typically slow seasonal sales in preceding weeks. Respondents in several areas noted strong sales growth at supermarkets. Retail inventories generally were in balance, with the key exception being short supplies of some new trucks and sport utility vehicles. Prices of most products reportedly were steady, with the exception of an increase in the prices of retail pharmaceuticals. Sales of telecommunications services, internet-related services, and computer software were strong. Port traffic was very high on the West Coast, as East Asian imports continued at a rapid pace while export traffic reportedly has stabilized and possibly even picked up a bit.
Manufacturing
District manufacturing activity reportedly picked up a bit recently, although demand in key sectors continues to be hampered by adverse trade conditions. Unit sales of high-tech equipment were solid, reportedly due in part to mild improvement in East Asian exports; this has been accompanied by slower declines in the prices of semiconductors and other computer components. A pickup in production and sales of wood products was reported for the Pacific Northwest. Production activity and sales were very strong for manufacturers of communications equipment, automobiles, and pharmaceuticals. In contrast, Boeing has seen cancellation of aircraft orders from China and other East Asian countries; reduction of the company's workforce has proceeded, and Boeing's suppliers are facing reduced demand due to the company's production cuts. In the machine tool, steel, and garment manufacturing industries, respondents noted stiff competition from low-priced imports, accompanied by shrinking employment in each industry and rising inventories in the latter two.
Agriculture and Resource-related Industries
District agricultural and natural resource suppliers faced somewhat weak conditions. Citrus growers in California's Central Valley suffered severe crop damage due to the freeze in late December. The associated losses were large in dollar terms, which has hurt the area's income, employment, and retail sales performance. Throughout the District, prices remained very low for key agricultural commodities, especially wheat. District beef sold well, due to strong exports to Mexico and a pickup in exports to Japan. In the extraction industries, low prices for oil and natural gas have reduced profits and employment in some areas, most notably Alaska, where oil companies reportedly have cut budgets by 25 to 30 percent.
Real Estate and Construction
Activity in the District real estate and construction sector was robust overall, although slowing was evident in some states. Home construction, sales, and price increases were rapid in most parts of California. A San Francisco respondent reported that lease rates for commercial space in the San Francisco Bay Area rose further, reaching levels equal to the historical highs of the late 1980s. In Hawaii, sales of existing residential properties reportedly were the only source of vigor in the otherwise moribund state economy. In other parts of the District, real estate market and construction activity has slowed a bit, easing earlier capacity pressure. The rate of increase in the cost of housing reportedly has slowed in Idaho, Utah, and Nevada. Respondents also reported that the cost of construction labor has fallen from previously elevated levels in Utah, and construction activity in general fell further in Oregon.
Financial Institutions
Demand for loans was strong in most areas and was met by vigorous competition among banks for loan applicants. Respondents in several areas of the District noted very competitive pricing and underwriting terms for loans. The pace of lending was rapid throughout California, although in the state's Central Valley bank business reportedly was reduced by economic difficulties associated with damage to the area's citrus crop. The only reported instance of deteriorating credit quality was from the Oregon coast, where loan delinquencies increased.
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Dallas