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Reports from Twelfth District contacts indicated continued expansion in most District states, although there are signs of slowing in several key sectors and of easing in tight labor markets. Contacts reported that holiday season retail sales were mixed, falling below expectations in many states. Conditions in the District manufacturing sector softened, and respondents noted some accumulation of inventories. Conditions in the District agricultural sector weakened further in recent weeks, as sales softened and prices remained low. Real estate and construction activity remained strong, especially in California and Hawaii. District contacts reported weaker loan demand and diminished credit availability for new office construction and for high-tech firms with weak profits. High energy prices reportedly have driven up costs for the manufacturing, transportation, and agricultural sectors. However, producers noted that competitive pressures have limited their ability to pass those higher costs on to consumers.
Wages and Prices
With the exception of energy, contacts throughout the District reported generally stable prices for inputs and consumer goods. Respondents also indicated some easing of tight labor markets and signs of slower job turnover rates since the last survey. These observations were attributed to increased uncertainty about the strength of the economy and slowing in the dot-com and technology sectors. One major high-tech manufacturer located in the District recently announced a hiring freeze and postponed raises for at least one quarter. Most respondents reported that wage increases have moderated somewhat, although several noted that health care costs continued to rise. In contrast, construction industry contacts in California indicated that labor shortages continued to put upward pressure on wages and construction costs.
Numerous District contacts cited concerns about energy shortages and costs. Respondents noted adverse impacts from soaring electricity and natural gas prices on the agriculture, transportation, and manufacturing sectors. For example, the costs of harvesting seafood, drying foods, and transporting and manufacturing goods have risen. Several agricultural, manufacturing, and retail sector respondents indicated that competitive pressures continued to limit their ability to raise prices of final goods and services. Respondents expect higher energy costs to affect retail prices and construction costs in the year ahead. Despite electric power and natural gas shortages and steep increases in energy costs, relatively few District contacts have revised their energy procurement strategies.
Retail Trade and Services
District retailers reported mixed holiday season sales growth. In most District states, holiday sales were reported to be at or below last year's dollar volume; in contrast, contacts in California and Hawaii reported increased holiday sales. Respondents noted that consumers were more cautious about their spending this holiday season, especially on big-ticket items, including computers. New car sales were weak, despite efforts to boost sales volume with discount pricing and low-cost financing packages. Contacts throughout the District reported that retailers moved early and aggressively to discount merchandise, especially clothing and electronic goods. However, while sales incentives helped move products, lower prices for consumer electronics and computers resulted in lower revenues from those sales.
District contacts indicated that holiday season Internet sales increased compared to 1999. Increased sales were attributed to more website visitors, increased confidence in Internet transactions, and more frequent use of the Internet by traditional retailers. Despite the strong growth, holiday Internet sales fell below expectations.
Manufacturing
District manufacturing conditions weakened in recent weeks. Contacts reported slower sales growth in the biotech, machine tools, and automobile sectors and flat construction equipment sales. Respondents cited indications of rising inventories among providers of high-tech equipment, construction equipment, and sporting goods. In contrast, shortages of raw materials used in the production of fiber optics equipment were reported.
Manufacturers expressed widespread concern about the negative effects of higher energy costs. Higher energy prices have driven up costs of producing most manufactured goods. One Nevada contact indicated that small business energy costs doubled in December, even with moderate weather. Production disruptions were noted: For example, one aluminum plant in the Pacific Northwest shut down its smelter operations because it was more profitable to resell the electricity under contract than to operate the plant.
Agriculture and Resource-Related Industries
District farmers reported weaker conditions in the latest survey period. Low prices, weak sales, and an increase in order cancellations have lowered profits for fruit and vegetable producers. The strong exchange value of the dollar also has limited exports of District farm products. Producers continued to find it difficult to pass on higher energy costs to wholesalers and retailers. District ranchers have fared better in recent weeks, with strong demand for calves and low feed costs.
Real Estate and Construction
Residential real estate construction activity remains strong in the District, although year-to-date housing permit activity in 2000 is reportedly below 1999 levels in all states except California and Hawaii. Respondents in those two states noted strong real estate activity and shortages of skilled construction labor and subcontractors. In contrast to previous survey periods, building materials reportedly are becoming easier to obtain. Contacts in Northern California and Washington reported a shortage of commercial office space. Respondents also reported that financing for new office construction has become more difficult to find in recent months.
Financial Institutions
Credit demand in the District has reportedly slowed in recent weeks. Financial industry contacts reported lower demand for both consumer and business loans. Respondents noted that financial institutions tightened credit standards and began monitoring credit quality more carefully.
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Dallas