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Reports from contacts indicated continued strong economic conditions in the Twelfth District during the most recent survey period. Service providers in the District noted an acceleration in growth above an already rapid trend, while retailers reported moderate increases in nominal sales. Manufacturing activity picked up in recent weeks, boosted in part by increasing export demand. Conditions among District agricultural producers were mixed, as the weather and prices improved for ranchers but deteriorated further for farmers. Activity in real estate and construction markets remained at high levels in most areas; strength was most notable in parts of California and Washington. Financial institutions reported good conditions, with little change in loan demand or credit quality.
District respondents expect continued strong national and regional economic growth in the near term. More than one-half of respondents expect U.S. GDP to exceed its long-run average pace in coming months, with the remainder of respondents expecting growth to proceed according to trend. Accordingly, most respondents expect the national unemployment rate to remain at or below its current level. A majority of respondents expect inflation to increase during the next twelve months; however, a growing number expect inflation to remain stable in coming quarters. About two-thirds of respondents expect economic growth in their region to outpace national growth in the year ahead, as improvements in their region's foreign trade balance augment strong growth in consumer spending and business investment. In contrast to previous survey periods, nearly two-thirds of District respondents expect housing starts to slow in coming months.
Retail Trade and Services
Overall, District respondents reported moderate growth in nominal retail sales during the survey period. Back-to-school shoppers reportedly remained cautious, searching for bargains and delaying purchases to take advantage of post-Labor Day sales. Sales growth reportedly was strongest at "big box" retailers and at speciality stores catering to niche markets. Department store sales were flat relative to last year in many areas of the District, as lower average selling prices offset higher unit sales. On the whole, District retailers reported adequate inventory levels and few merchandise supply problems.
Service industry respondents in most District states reported strong growth. Demand for telecommunications and cable television installations surged in recent weeks, producing material shortages and delaying deliveries in some regions. However, prices for most telecommunications and cable products remained stable due to stiff competition among providers. Respondents from California and Nevada reported solid growth in tourism-related restaurant sales, car rentals, and hotel occupancy rates. In contrast, the tourism sectors in the Pacific Northwest and Hawaii remained weak relative to previous years.
Reports from contacts indicate improved conditions in the District's manufacturing sector in recent months. Domestic demand for manufactured products remained strong, and contacts noted a pickup in demand from East Asia for a diverse set of products including industrial machinery and equipment, electronic components, wood products, chemical products, and processed foods. Increased demand reportedly has allowed many producers to draw down excess inventories and boost capacity utilization rates at their plants. On the downside, new orders for commercial aircraft remained weak, and layoffs among major producers and suppliers continued. Overall, District manufacturers reported few difficulties obtaining materials or supplies, no capacity constraints, and stable or declining prices for many key inputs.
Agriculture and Resource-related Industries
District agricultural producers reported mixed conditions in recent weeks. Conditions for cattle ranchers improved in recent weeks. Export demand strengthened, prices rose, and low grain prices kept costs down, generally boosting the profitability of producers in most sectors of the beef industry. In contrast, unseasonal weather during much of the summer resulted in poor quality crops and low yields among producers of grains and fruits and vegetables. For grain producers in the District, short crops have combined with low commodity prices to constrain profitability, a problem that reportedly has begun to raise concerns about the repayment of production and equipment loans.
Real Estate and Construction
In general, residential and commercial real estate activity remained at high levels in the District in recent months. In the San Francisco Bay Area, Southern California, and Washington's Puget Sound region, growth in residential and commercial real estate sales remained robust, resulting in lower vacancy rates and rising prices. Elsewhere in the District, respondents noted that higher mortgage rates, rising building costs, market saturation, and the fear of overbuilding have contributed to slowdowns in both residential and non-residential construction. Despite the recent slowdown in some states, building materials such as drywall, concrete, and structural steel, reportedly remain in short supply.
District financial institutions continued to report healthy loan demand and generally good credit conditions. Financing remains readily available for qualified businesses, and stiff competition is encouraging lenders to offer favorable financing terms. Reports regarding loan delinquency rates and new loan quality were little changed in recent months, although contacts expressed some concern about the quality of agricultural loan portfolios. The ongoing consolidation in the banking industry has left many experienced financial-sector workers available for hire, keeping wage pressures in this industry to a minimum.