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Summary
Reports from Twelfth District contacts indicate continued solid expansion in the recent survey period, although there were signs of moderation in some sectors. District retailers reported healthy sales volumes, but slower sales growth, while service providers noted continued strong demand for most products. Manufacturing activity in the District remained solid, with many sectors posting strong growth. Conditions for District agricultural producers generally were favorable, despite increased production costs. Residential and commercial real estate activity generally remained at high levels, although the pace of growth slowed in most areas. Contacts throughout the District noted tighter credit conditions for a number of borrowers. Respondents reported that increased energy prices have begun to affect production costs. However, competitive pressure continued to hold down prices of final goods.
Wages and Prices
Labor markets remained tight throughout much of the District. Contacts noted difficulty recruiting managers, pharmacy technicians, construction tradesmen, and energy extraction workers, as well as anyone with computer or technical skills. Despite persistently tight labor markets, respondents reported few instances in which wage increases were outstripping productivity gains. However, District contacts noted a pick up in benefit costs on existing packages and increased employee demand for more comprehensive benefit schemes.
In regard to prices, increased fuel and energy prices reportedly have begun to affect production costs in a wide variety of industries. Sharp increases in electricity prices over the past several months have raised direct operating expenses for many manufacturers and retailers. Higher fuel prices have boosted shipping costs, and increased prices for petroleum-based products, such as plastic bags and containers, have raised packaging costs. However, contacts noted that, with a few exceptions, competitive pressure has prevented producers from passing increased costs on to consumers. Although spared the indirect costs of rising energy prices, some District consumers are paying higher prices for electricity. In San Diego, for example, the retail price of electricity doubled in recent months.
Retail Trade and Services
Retailers throughout the District reported healthy, but slower, growth in sales, particularly of non-food items. Higher financing costs and increased gasoline prices reportedly tempered sales of SUVs and trucks, especially in the Intermountain states. Slower sales also were reported among apparel retailers, producing modest inventory accumulation. Advertising contacts noted a drop in demand for print advertising among retail outlets. Sales of grocery items and pharmaceuticals remained robust in recent weeks.
In the services sector, demand for District telecommunications, transportation, and tourism services remained high. Respondents reported that demand for telecommunications and Internet-related services picked up; container traffic through the Ports of Long Beach and Los Angeles remained brisk; and visitor arrivals to Hawaii from the United States accelerated during the recent survey period, increasing hotel occupancy rates and room prices.
Manufacturing
Manufacturing contacts throughout the District reported generally solid conditions. Contacts in District pharmaceutical, semiconductor, machine tool, wood pulp, and paper product industries reported strong sales. Semiconductor manufacturers described strong demand and high capacity utilization rates. Contacts noted a pickup in commercial aircraft orders from East Asia. Reports from the Intermountain states indicated that steel manufacturing has begun to stabilize from its earlier weakness; however, sales of machinery and heavy equipment have slowed, producing some inventory accumulation. In the Pacific Northwest, domestic and foreign orders for wood pulp and paper products remained brisk. In contrast, orders for lumber and structural panels have declined, and inventories reportedly are accumulating.
Agriculture and Resource-related Industries
Agricultural producers in most District states reported favorable growing conditions during the most recent survey period, except for Southern Arizona which has been suffering a drought. District beef producers reported further increases in demand and prices, and seafood producers noted strong demand and low inventories. Nut growers in California and Arizona reported increased domestic and export demand. Favorable growing conditions among fruit and vegetable producers reportedly have swelled inventories, putting downward pressure on prices. Growers throughout the District noted that increased packaging and transportation costs and higher credit costs are restraining profits.
Real Estate and Construction
Residential and commercial real estate activity generally remained at high levels, although the pace of growth slowed in most areas. Residential real estate activity slowed in the Pacific Northwest, and housing starts reportedly declined in Oregon. In Washington, residential price appreciation continued to slow, and respondents noted that homes are staying on the market longer. Similarly, contacts reported a slowing of home sales in Nevada, although home prices remained stable. In California and Arizona, home sales remained strong, and residential construction activity remained at high levels, although the timing of some sales and projects has been affected by mortgage rate fluctuations. Growth in demand for commercial properties slowed in recent weeks in many areas in the District, tempering price appreciation and easing vacancy rates. Southern California was the exception to this general trend; demand for commercial and industrial construction picked up slightly in that region, driven by growth in distribution and warehouse activity. Despite signs of slowing, construction activity remained at high levels and demand for materials and workers was robust.
Financial Institutions
District contacts reported a tightening of credit availability throughout the District. District agricultural producers, manufacturers, and builders reported increased scrutiny of loan applications. Contacts in Washington reported that Internet retailers are having more difficulty accessing venture capital. Although it is reportedly more difficult to obtain financing for large and unproven businesses, quality small and medium-sized borrowers had no difficulty obtaining loans.
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Dallas