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Twelfth District contacts reported continued slowing in economic growth and reduced pressures on non-energy related prices and wages in most sectors in the June to late-July period. The cost of energy at the retail level increased on balance, as higher electricity rates were only partially offset by lower rates on natural gas. Respondents indicated that conservation was the most common action taken to offset higher electricity prices; though there were isolated reports of curtailments in production. District retailers experienced weak sales and many offered price discounts. Manufacturers reported further deterioration in sales and continued contraction in employment. With few exceptions, respondents indicated that investment in high-tech equipment and software remained depressed. Respondents also noted that conditions softened in commercial real estate markets, while single-family housing markets remained more stable. District agricultural producers continued to struggle against low prices, weak exports, higher energy costs, and the weather. District financial institutions reported further tightening of lending standards and weaker demand for credit.
Wages and Prices
Twelfth District contacts reported evidence of reduced pressures on prices in several sectors, with a notable exception being retail electricity rates, and on wages in the June through late-July period. Further increases in retail electricity rates put additional pressure on businesses and consumers, though forced outages were limited. In addition to lower natural gas and gasoline prices, respondents noted lower prices for a range of non-energy producer inputs, including lumber and other construction materials. Lower airline fares, advertising fees, and rental rates also were reported. Retailers and manufacturers offered discounts to promote sales. In contrast, prices for prescription drugs have increased substantially. In labor markets, with a few exceptions, contacts indicated that slower economic growth was responsible for an easing of pressures on wages.
Twelfth District businesses continued to adjust to the high cost of electricity during the June to late-July period. Respondents frequently cited aggressive conservation efforts to reduce usage and costs. Some respondents also have added backup power systems and a few have changed production schedules. Some power suppliers have been buying power back from farmers and large industrial users, which in turn have reduced their operations. Some hotels and construction firms reported passing along higher energy costs to consumers, while other contacts, especially those in agriculture, reported that they were absorbing the higher costs.
Retail Trade and Services
Twelfth District retailers recorded generally weak sales in the period from June through late-July. Retailers noted that discounts were common and larger than normal for the early summer season. Contacts reported that sales were running behind forecasts and comparable store sales were lower than last year. However, contacts from the Intermountain region reported that new car and light truck sales rose in June and dealers were working down inventories.
Service sector jobs in the District remain at close to December 2000 levels. Contacts reported cutbacks in jobs in the high-tech services and advertising sectors. Respondents from Hawaii noted that the travel and tourism services sectors have slowed, and the most recent published data show May hotel occupancy rates were below year-earlier rates.
Manufacturing
Twelfth District manufacturing conditions remained weak and employment continued to contract. Contacts reported weak sales of non-durable goods -- such as apparel, sporting goods, and paints and coatings -- as well as durable goods -- such as computers and communications gear. Third quarter semiconductor sales are expected to fall below second quarter sales; however, new orders have picked up somewhat, and progress was made in reducing inventories during the first half of this year. Excess capacity was reported for semiconductor manufacturers and telecommunications, including broadband networks. New orders for commercial aircraft remain weak, reflecting sluggish passenger traffic growth in 2001 and weak earnings among airlines.
With few exceptions, District contacts reported that the level of investment spending on computers, information-processing technology, and software remained below spending on such items a year earlier. Respondents attributed the reduction to high levels of high-tech investment in 2000 and a general cutback in investment in response to uncertainty about the outlook for the economy and efforts to reduce costs. While contacts indicated that the pace of investment spending had not deteriorated in the June through late-July period compared to the previous survey period, neither did they report signs of an upturn.
Agriculture and Resource-related Industries
Twelfth District agriculture has continued to struggle. Favorable domestic farm production levels were offset by depressed world market prices and a strong dollar that limited export sales. High electricity costs and water shortages in several states put further pressure on the farm sector. District ranchers continue to benefit from steady cattle prices, but may face higher costs and lower yields as a result of drought-like conditions. Respondents indicate that lumber mills in the Pacific Northwest have cut back production, partly in response to import competition and lower lumber prices.
Real Estate and Construction
Respondents noted that conditions softened in a number of commercial office markets. Office vacancies jumped up in second quarter in several metropolitan areas in the District, and reportedly continued to rise in July. Contacts noted a sharp decline in the demand for office space in the California markets of San Francisco and the Silicon Valley during the period. The rise in office vacancies in those markets was attributed to the Bay Area's economic slowdown, especially in the high-tech sectors, that has led to a sharp increase in availability of sublease space. Respondents also indicated that expectations of potential tenants that lease rates will fall further might be damping leasing activity. In Oregon, new construction and leasing activity were slower than expected. In addition, increased sublease space and new speculative office building have pushed up office vacancy rates further in Utah.
In the residential sector, respondents indicated that single-family housing markets remain stable in most of the District. Single-family markets reportedly were boosted in part by relatively low mortgage rates. There are signs, however, of a slowdown in home sales in the high-end market in the San Francisco Bay Area. Declines in rental rates in some markets also could affect multi-family construction activity.
Financial Institutions
Twelfth District financial institutions reported that credit conditions continued to tighten during the June to late-July period. California lenders noted they were experiencing slower growth in loans and deposits. Slower loan growth was attributed to tighter lending standards, including for new customers and small businesses, and weaker demand for credit. Overall, respondents note that bank balance sheets remained healthy and earnings were good.
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Dallas