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Reports from Twelfth District contacts indicated additional slowing in economic growth during the survey period of August and early September, with limited upward pressure on wages and prices. Wholesale energy prices have fallen, but retail electricity rates remained high. Consumer spending softened a bit in most areas. Continued weak demand was reported by manufacturing contacts, although previously high inventories have been worked down in some sectors, and contacts reported that orders for high-tech equipment may be improving a bit. Due to uncertainty about future sales, however, manufacturers and other businesses generally focused on maintenance of existing productive capacity, rather than expanding capacity. In real estate markets, demand for commercial and industrial space remained weak, while demand for residential property was solid in most areas. District agricultural output was high and prices low. Lending activity by financial institutions slowed in some areas, as borrowers reduced their demand for credit and banks tightened lending standards on business loans.
Wages and Prices
Reports indicated small wage increases in general and little or no upward pressure on the prices of final goods and services. Wholesale prices for natural gas and electric power have fallen substantially since earlier this year, easing margin pressures for energy distributors and reducing operating costs for businesses that purchase wholesale electricity. Although capacity constraints for electrical generation and transmission are still evident, increased generation capacity in California and other areas has combined with lower natural gas prices and lower usage to reduce wholesale electricity prices; retail prices, however, are above last year's levels. In regard to consumer goods, respondents noted extensive discounting and clearance sales for small and large items, and prices for retail goods and services reportedly were flat to down overall. Wage pressures were moderate, with observed increases in a variety of sectors ranging from 2 percent to 4 percent on an annual basis. One respondent in the Pacific Northwest noted significant easing in previously tight labor markets, with far more job applications received for existing openings than in the past.
Retail Trade and Services
Demand for retail merchandise was flat to down during the survey period. Sales in most areas reportedly declined for durable and nondurable products alike, with contacts specifically mentioning reduced sales of automobiles, home appliances, home computer products, and apparel. The only exceptions to reports of weak retail sales were indications of continued spending growth in parts of Southern California and in Hawaii, and continued strong sales of pharmaceuticals in most areas. Several respondents attributed sluggish spending to consumer caution induced by uncertainty about future economic prospects.
Reports regarding demand for consumer and business services were somewhat downbeat. Employees at law firms in the Pacific Northwest faced ongoing layoffs, especially by firms that focus on corporate finance, and activity in the restaurant trade slowed in California. However, respondents from Hawaii noted that hotel receipts and other tourist-related commerce held steady or picked up somewhat.
Manufacturing
Demand was weak and production activity was sluggish in all areas of manufacturing. Sales remained depressed for most durable manufactured products, such as industrial equipment and forest products, and orders for commercial aircraft reportedly were "weak and may get worse." According to several contacts, sales of high-tech equipment were slow but may have bottomed out, as orders for personal computer and communications products improved a bit during the survey period. Contacts in high-tech manufacturing and other sectors reported that inventories have been reduced, with one respondent pointing out that the inventory buildup in manufacturing was addressed "more rapidly and efficiently than in past economic slowdowns." However, inventories of high-tech products reportedly remained high during the survey period, and further improvement in high-tech and industrial equipment sales will be hindered by business caution regarding new investment. Respondents from all sectors noted that businesses generally are focusing on maintenance of existing productive capacity, with little or no plans to expand capacity until substantial improvement in final demand is evident. For example, capital spending outlays in the semiconductor manufacturing industry this year are expected to be nearly 30 percent below last year's levels.
Agriculture and Resource-related Industries
Agricultural contacts reported that yields, availability, and quality were good during August and early September, but prices were low. Inventories were high for a variety of products, notably cotton, almonds, pecans, tomatoes, and dried fruits. As a result, farmers generally faced low market prices for these products. Cattle ranchers also struggled somewhat, as increased demand for beef was matched by increased supply, keeping prices low.
Real Estate and Construction
Reports indicated little change from ongoing softness in the markets for commercial, industrial, and retail space. Weakness was most evident in high-tech centers, especially in Oregon, California, and Washington. Vacancy rates on office space reportedly rose into double digits in Seattle, compared to 4 percent at this time last year.
Demand for residential property remained solid in the District, although some areas showed signs of moderation. Reports indicated that in most areas home purchases continued at a solid pace, due in part to lower mortgage rates. In Hawaii, apartment rents increased noticeably, due to rising demand combined with limited new construction. However, contacts noted a slowdown in sales of upper-end homes in California, and in Utah homes were staying on the market longer and sellers showed increased willingness to negotiate on prices and terms.
Financial Institutions
Lending activity and credit conditions in the District were mixed. Loan demand by businesses and consumers was weaker during the survey period than earlier in the year, and loan activity was further reduced by banks' imposition of tighter credit standards for business loans. However, a respondent in Southern California noted that loan demand remained "healthy" there, and mortgage loan activity was strong in most areas as households took advantage of low mortgage interest rates.
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Dallas