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Reports from Twelfth District contacts indicate overall solid expansion in most states, although signs of slowing were apparent in some industries. Better than expected holiday sales boosted overall sales growth among retailers and service providers in the District in recent weeks. Manufacturers of aircraft and high-tech goods reported solid, but slower, sales growth, while producers of other manufactured goods noted a decline in demand, particularly from foreign buyers. Conditions among District agricultural producers were mixed, as demand and prices improved for ranchers but remained weak for farmers. District real estate and construction activity remained at high levels, due largely to a pickup in demand for home remodeling and ongoing strength in commercial real estate markets. Credit demand in the District remained high in recent months, although some borrowers faced tighter terms for loans. Respondents reported that energy and wage costs have continued to rise, but competitive have pressures prevented producers from passing increased costs on to consumers.
Wages and Prices
Labor markets remained tight throughout much of the District. Labor shortages in the construction industry, particularly of skilled workers such as plumbers and electricians, reportedly have increased building costs and, in some cases, delayed the completion of projects. Contacts in the energy industry noted that wages for workers involved in the exploration, production, and processing of oil and natural gas rose rapidly in recent months, increasing at double-digit rates in some areas. District retailers reported difficulty recruiting temporary employees for the holiday season, forcing many firms to offer higher wages and larger employee discounts on merchandise than originally budgeted. Nearly all District contacts noted that employees with financial or computer skills remain in short supply.
District contacts reported that increased job-hopping by employees has begun to affect compensation practices. One contact noted that signing and retention bonuses are being replaced by company cars and other perks that end when the employment relationship terminates. Respondents noted that while labor, fuel, and energy costs have risen in recent months, competitive pressures, both domestic and foreign, have prevented most producers from raising the prices of final goods and services.
Retail Trade and Services
District retailers reported better than expected sales growth in recent weeks, as consumers responded to a rash of pre-holiday discounting on popular, mainline merchandise. Sales growth reportedly was strongest at "big box" retailers, which used pre-holiday discounting, merchandise give-aways, and "earlybird" contests to attract customers. Department store sales also beat expectations, although sales growth was more modest. Respondents indicated that toys--particularly electronic games and scooters--were among the fastest sellers, followed by consumer electronics, apparel, and decorative gift items. In some areas, sales of electronic goods reportedly were constrained by shortages of the most popular items, such as personal computing devices and game consoles.
Service industry respondents in most District states reported strong growth in recent weeks. Demand for telecommunications (cell phones), data communications (DSL), and cable television remained robust, lengthening the time to service in a number of areas. Despite the dot-com shakeout, demand for software and information processing services remained intense, and computer services workers were in short supply. Growth in demand for warehouse and distribution services picked up in recent months, as retailers prepared for the holiday selling season. In California and Hawaii, strong demand for hotels pushed occupancy rates up and boosted room prices.
Manufacturing
District manufacturers reported sound sales in recent weeks, but they noted that the dot-com shakeout, volatility in the stock market, and the rising exchange value of the dollar have begun to slow sales growth. Contacts noted that fluctuations in the market for high-tech stocks and the closure of many dot-com businesses damped demand for Internet-related hardware and electronics. Biotech companies also saw slower growth in orders, and access to financing reportedly has begun to affect development schedules for new products. In contrast, semiconductor manufacturers continued to report robust sales growth and increasing capacity utilization, but noted that prices on all but the fastest chips have begun to decline rapidly. Contacts in the machine tool industry noted that order growth remained strong, but order cancellations picked up in recent weeks, particularly from foreign buyers. Lumber and wood product manufacturers as well as apparel makers noted that increased import competition has begun to temper demand and damp sales.
Agriculture and Resource-related Industries
Conditions for District agricultural producers were mixed during the most recent survey period. Improved weather, strong demand, and firm prices produced good conditions for ranchers in the District. In contrast, farmers struggled with low prices and rising energy and distribution costs. Both ranchers and farmers noted that they are unable to pass increased energy costs on to wholesalers or retailers. District energy producers reported strong demand for oil, natural gas, and electricity.
Real Estate and Construction
Real estate construction and sales activity remained at high levels in most District states. Contacts in many District states noted that home sales have slowed and sales price appreciation has decelerated from earlier in the year, tempering growth in new residential construction. At the same time, contracts for home remodeling have picked up, keeping residential construction activity at high levels. Commercial real estate markets remained strong in most District states, although building permit activity reportedly is down from last year. Building materials and skilled construction workers remain in short supply throughout the District. Respondents noted that material and worker shortages have begun to boost wage rates and building costs, and lengthen completion times.
Financial Institutions
Credit demand in the Twelfth District remained strong in recent weeks, although some borrowers faced tighter terms. Commercial loan demand at banks remained high, and banking contacts reported ample capital to meet borrowers' demands. However, concerns about credit quality reportedly have restrained bank lending, resulting in higher terms and rates for commercial borrowers. Agricultural lenders noted that weak conditions for some farmers have begun to decrease the quality of their agricultural loan portfolios.
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Dallas