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Reports from Twelfth District contacts indicate that economic activity grew modestly in September and early October. Upward price and wage pressures remained muted overall. Sales of automobiles and smaller retail items slowed a bit, and service providers reported mixed conditions across sectors. Demand for most manufactured items remained weak, due in part to limited spending on capital equipment; however, orders and sales for some products, such as semiconductors and pharmaceuticals, grew further. Agricultural contacts noted good yields and sales for most crops. Although some agricultural producers faced increased shipping costs due to the recent work stoppage at West Coast ports, the effects of the work stoppage on other sectors were limited. Demand for commercial real estate remained soft, and home sales cooled a bit in some areas but remained at very high levels. Financial institutions saw continued weak demand for business loans but strong household loan demand, spurred largely by mortgage refinancing.
Prices and Wages
Reports indicate little upward pressure on prices and wages in the most recent survey period, with the notable exceptions of rising prices for health care and shipping services. The prices of many retail products and services reportedly were flat to down, with steep discounting reported in some cases. Wage increases were limited in all areas by ample availability for most types of labor. By contrast, most businesses continued to adjust to rising costs of health insurance, with a significant portion of the increase passed on to employees. The labor dispute and consequent work stoppage at West Coast ports led to increases in the prices of alternative shipping modes, although these increases are likely to be temporary, pending a return to normal port operations.
Retail Trade and Services
Demand for retail items weakened somewhat in September and early October, and service providers faced mixed but generally soft demand. Automobile sales slowed somewhat despite continued favorable financing terms. Demand for smaller retail items fell a bit further compared to the previous survey period; large discount chains continued to outperform department stores and specialty retail outlets, but sales reportedly weakened in all market segments. Travel demand was sluggish in most areas, with occupancy and room rates reportedly below normal. In Hawaii, domestic tourist counts were above normal (based on levels measured prior to last year's terrorist attacks), but this was more than offset by low counts of international tourists. Somewhat weak demand for trucking services was exacerbated a bit by temporary disruptions in service caused by the work stoppage at West Coast ports. Business consultants and Internet connectivity providers saw very weak demand, with further closures by the latter reported in the Pacific Northwest. By contrast, demand for medical laboratory services continued to grow, and advertising companies benefited from a temporary demand surge associated with election season political campaigns. Spending on capital equipment remained at low levels for most retailers and service providers, but a few reports indicated increased spending on computer software.
Manufacturing
Manufacturing activity was somewhat sluggish overall during the survey period. Semiconductor producers saw a further modest pickup in demand, with capacity utilization rising and prices firming somewhat in recent weeks. However, orders and sales for other manufactured products were soft, with especially weak reports provided by makers of telecommunications equipment, commercial aircraft, and machine tools. Demand for durable manufactured products was held down by weak spending on capital equipment, with companies in all sectors of the economy exhibiting reluctance to spend beyond the minimum needed for maintenance of their existing equipment base. Among makers of nondurable products, clothing manufacturers reported little or no growth in orders. By contrast, producers of pharmaceuticals reported continued solid demand growth. The recent work stoppage at West Coast ports disrupted some manufacturing supply chains, although the impact on overall manufacturing activity was negligible.
Agriculture and Resource-related Industries
Demand for agricultural and resource-related products grew in the survey period, although adverse supply conditions affected performance in some sectors. Yields and sales of fruits, vegetables, and nuts were high, and inventories were maintained near desired levels. Overseas demand for District crops was solid, spurred in part by the weakened dollar, but some agricultural producers incurred excess storage costs because the work stoppage at West Coast ports prevented the timely shipment of perishable products to customers abroad. Moreover, cattle ranchers faced high feed and grazing costs that prompted herd liquidation at low sales prices. Contacts reported that electricity supply conditions were adequate to meet demand and keep prices stable in the near term.
Real Estate and Construction
Demand for commercial real estate remained weak, while home sales were rapid but a bit slower in some areas compared to the previous survey period. In most areas, vacancy rates for commercial and industrial space reportedly have stabilized at high levels and commercial construction activity remained quite depressed; healthy demand conditions were reported only for parts of southern California. By contrast, residential demand remained robust throughout the District, with especially rapid sales growth reported for Hawaii, Southern California, and the Sacramento area. However, the pace of sales and price appreciation fell in some other areas, most notably in Utah. The pace of new home construction also was high in most parts of the District but fell a bit in some areas.
Financial Institutions
Financial institutions reported mixed loan demand and credit conditions. Weakness in business loan demand persisted, and lenders competed for low risk loans in several District markets. By contrast, low interest rates spurred further growth in home mortgage refinancing and kept overall household loan demand high. Banks reported strong deposit growth, but credit quality was somewhat mixed, with increasing delinquencies and loan defaults in some markets.
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Dallas