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Reports from Twelfth District contacts indicated sluggish economic activity in October and early November, with the pace of growth down from the previous survey period. Respondents reported little pressure on prices for most consumer goods and services. Wage increases also were limited, although increased health benefit expenditures boosted employee compensation costs. Consumer spending softened in recent weeks, especially for big-ticket items such as automobiles, furniture, and consumer electronics. Demand for manufactured goods other than semiconductors remained weak, with contacts noting deterioration in orders. District agricultural producers reported little change in conditions, with balanced supply and demand keeping prices above costs. District housing demand remained solid, although signs of cooling were apparent. Commercial real estate markets continued to weaken, with vacancy rates rising and lease prices falling. Bank contacts reported ongoing reductions in commercial loan demand and some slowing in the pace of nonresidential consumer borrowing.
Prices and Wages
District contacts reported little change in consumer prices in the recent survey period but noted downward pressure on input costs, especially energy. Shipping costs were the main exception to this trend; trucking and shipping companies (vessel and air) reportedly imposed transit surcharges and congestion fees at many West Coast ports in response to disruptions stemming from the eleven-day lockout. Overall, falling input costs reportedly helped boost profit margins in a number of sectors.
Ongoing weakness in labor markets further eased wage and salary pressures in the District during the most recent survey period. Wage increases were scant across sectors, and contacts noted that many firms now have cancelled year-end bonus programs scheduled earlier in the year. On the benefit side, employers noted rapid increases in employee health-care costs this year--15 percent to 20 percent higher than last year. A number of contacts noted that employees are being asked to absorb a portion of these increases.
Retail Trade and Services
District consumers reportedly pulled back their spending in October and early November, especially for big-ticket items. District auto dealers noted that sales of new cars and trucks fell 20 percent to 30 percent in October and early November relative to September volumes. The decline owed in part to the end of zero percent financing on a number of models and the decline in trade-in values on used cars. Despite the rapid shift in vehicle demand, contacts reported no inventory imbalances. Sellers of other durable goods including furniture, consumer electronics, and appliances also reported decreased demand for their goods. Specialty apparel sellers and big-box retailers reported stable nominal sales, although deep discounting continued to limit profitability. In general, retailers reported that inventory-to-sales ratios remained low and at targeted levels.
Respondents in the services sector noted that the demand for IT services and software development and accounting, financial, and legal services remained soft in recent weeks. Public relations and advertising firms got a boost from national and local election campaigns and from retailers gearing up for the holiday selling season. District travel and tourism sectors remained weak in October and early November, despite generally favorable weather conditions--early snows and cold conditions in ski areas and warmer-than-average weather in Northern and Southern California. Domestic tourism mostly has returned to pre-September 11 levels, though international visitor counts remain weak.
Manufacturing
Conditions in District manufacturing were mixed in recent weeks, as demand and orders weakened but profitability improved. Falling input prices, increased efficiency, and ongoing job cuts boosted profits among many District manufacturers, especially in the high-tech sector. However, District contacts reported declines in new orders and increased shipment cancellations in recent weeks, prompting many to mark down sales forecasts for the fourth quarter. Excess capacity, both in capital and employees, remained a serious concern among most District manufacturers. In contrast, inventories reportedly were low relative to sales, keeping carrying costs in check.
Agriculture and Resource-related Industries
District agricultural conditions reportedly changed little from the previous survey period, with balanced demand and supply keeping prices above costs for most producers. Increased shipping costs were the primary concern, with many producers reporting transit surcharges and congestion fees at West Coast ports. Lower energy costs reportedly helped boost profit margins, partially offsetting ongoing increases in employee wage bills. District contacts noted that the supply of immigrant laborers from Mexico has declined in recent months, boosting wage rates for agricultural workers during this harvest season.
Real Estate and Construction
Conditions in real estate softened during the most recent survey period, with slower growth in home sales and prices and further deterioration in a number of commercial office markets. The release of office space among several financial and IT companies pushed office vacancies higher and lease rates lower in several District cities. Although the increases were modest relative to earlier in the year, they came after several months of stable conditions. Accordingly, new commercial development has all but stopped in the District.
Residential real estate markets in the District remained solid in recent weeks, although the pace of sales and price appreciation slowed, especially at the high end of the market. The slower pace of activity damped residential construction in many District states. In the San Francisco Bay Area, construction on some multifamily housing projects was put on hold. Elsewhere in the District, start times for several residential developments have been pushed back until the economy improves.
Financial Institutions
District contacts reported solid growth in deposits and further declines in nonresidential loan demand in October and early November. In most areas, home mortgage financing activities remained high, although the pace of applications has slowed relative to earlier in the year. District financial contacts noted a drop in demand for nonresidential consumer loans, driven in part by reduced vehicle purchases. Loan delinquencies and defaults were changed little during the recent survey period. Banking contacts noted increased inquiries on the part of businesses regarding loans for inventory investment. However, as of early November, demand for such loans had not increased.
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Dallas