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Contacts reported solid expansion of economic activity in the Twelfth District during recent weeks. Further growth in consumer demand fueled rapid sales of retail merchandise and services. Due in part to improved trade conditions, District manufacturing activity expanded further, and demand and prices increased slightly for District agricultural producers. Real estate markets remained highly active, especially in California, although commercial and residential markets have cooled a bit in some regions. Financial institutions reported strong demand for credit and vigorous competition among lenders. Despite reports of labor and materials shortages in some sectors, upward pressure on wages and prices was modest overall.
Business Sentiment
District respondents remain optimistic regarding the performance of the national economy and their respective regional economies during the next four quarters. Just over half the respondents expect the growth rate of national GDP to exceed its long-run average, and a similar percentage expect the national unemployment rate to remain at or near its current level. The percentage of respondents expecting an increase in inflation also was just over half. Most respondents anticipate that growth in their region will outpace growth in the national economy during the next four quarters, with a two-thirds majority expecting further improvement in their region's outlook for international trade.
Retail Trade and Services
District contacts reported generally rapid sales of retail merchandise and services during the recent survey period. Sales of food, beverages, and pharmaceuticals exhibited solid gains in most areas. In California, department store sales of winter merchandise picked up in recent weeks, as unseasonably warm weather gave way to cooler conditions. Automobile sales reportedly slowed further in Utah during November; popular models of light trucks and sport-utility vehicles remained in short supply, but availability of previously scarce imports improved somewhat. Among services, the strongest reports were for telecommunications and Internet-related services, for which demand growth remained brisk.
Many retail and service contacts reported difficulty finding entry-level and skilled workers. Upward wage pressure was moderate on net, however, as employers relied on other incentives, such as increased merchandise discounts for seasonal employees. Reported price increases also were limited; costs have been held down by productivity enhancements at some firms, and prices more generally were restrained by vigorous competition.
Manufacturing
District manufacturing activity expanded in the recent survey period due to solid domestic demand and further improvement of trade conditions. Respondents noted stepped up demand for steel and equipment intended for use in industrial, construction, and agricultural settings. Continued growth of Asian and European demand led to strong sales growth and firming prices for makers of wood and paper products, and District producers of textiles and apparel reportedly benefited from strong domestic demand and slightly higher prices on competing Asian imports. Demand for telecommunications and computer equipment remained strong; respondents noted some supply constraints-including a shortage of flat panel displays that has hobbled production of laptop computers-but effects on final product prices reportedly have been limited. The key source of weakness in the District manufacturing sector was aircraft manufacturing, in which orders and activity continued to fall.
Agriculture and Resource-Related Industries
Conditions for District agricultural producers improved slightly during the most recent survey period. Beef producers increased the amount supplied in response to continued strong demand, and profitability has been good for producers of dairy products and nuts. Export demand and prices reportedly have risen for some agricultural commodities, although sales revenues for cotton and many grains and vegetables remained weak. District agricultural contacts reported some delays in obtaining packaging materials and transportation services but no significant supply disruptions.
Real Estate and Construction
Activity in the District construction sector and real estate markets remained at high levels, although signs of slight cooling were evident in some regions. Residential construction and sales remained rapid in the most heavily populated areas of California and Arizona. In contrast, slower residential construction activity and price appreciation were evident in Oregon and Utah, and the previously torrid pace of growth in Seattle reportedly has slowed somewhat. Activity in nonresidential markets was robust in most areas, although slower construction activity, rising vacancy rates, or both were reported for Oregon, Utah, and Arizona. Construction labor and some building materials, such as structural steel, remained in short supply, but in general contacts did not report significant increases in construction costs.
Financial Institutions
District financial institutions reported generally solid loan demand and good credit conditions. Strong demand in most loan categories was met by readily available credit, and margins were kept relatively narrow by vigorous competition for borrowers. However, contacts in several areas noted that demand for real estate loans fell a bit and the pace of mortgage refinancing slowed in recent weeks.
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Dallas