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Reports from Twelfth District contacts indicate modest economic growth in late July and August, with substantial variation in conditions across and within sectors. Wage and price increases were limited. Respondents noted solid consumer demand for automobiles and other big-ticket items, but sales of other retail trade and service items generally were flat to down. Orders and sales of most high-tech and other manufacturing products were sluggish, with excess capacity still a concern. In agricultural markets, despite solid overall conditions, some producers struggled with adverse supply factors, while energy markets saw stable supply. Demand for commercial real estate was weak, with rents falling further in some markets, but residential demand remained solid. Financial institutions saw weak demand for business loans, and they tightened credit standards for riskier business loan applicants.
Prices and Wages
District contacts reported little upward pressure on wages and prices in the most recent survey period, except for employer benefit costs. Widespread price discounting was reported at the wholesale and retail level for many consumer products and for high-tech, travel, and professional services. Rising energy prices increased production costs a bit in the agricultural and manufacturing sectors. Contacts indicated abundant labor supply and flat to slightly elevated wages, with substantial willingness on the part of job seekers to accept smaller compensation packages. However, some employers, especially in the high-tech sector, reportedly have resumed paying merit increases after suspending them last year. Increases in the cost of health insurance raised employers' benefit costs noticeably, and recent labor unrest has raised concern for near-term economic activity in the shipping industry, commercial aircraft manufacturing, and Hawaii's lodging sector.
Retail Trade and Services
Retail sales were mixed during the survey period. Contacts reported solid automobile sales and increased sales of large appliances, spurred by favorable financing terms and, for appliances, strong home sales. Sales of smaller retail items were weak in general, falling relative to the previous survey and year-earlier levels. Inventories for retail goods were stable and quite lean, with one respondent noting that the preference for tight inventories among clothing retailers was reinforced by the perception of heightened demand risk that has emerged in the aftermath of September 11.
Conditions also were mixed in the District's service sectors. In Hawaii's tourism sector, weak counts for international visitors were largely offset by strong domestic travel, bringing the sector close to year-earlier performance levels. However, travel demand elsewhere was generally weak, with slight additional deterioration reported for the San Francisco Bay Area; some airlines faced financial difficulties due to weak demand for air travel. Providers of telecommunications services struggled with their bottom lines and implemented further layoffs in some areas. However, demand for health services expanded further, and improved demand and firming prices were noted for broadcast advertising.
Conditions in the District's manufacturing sector were weak, with mostly flat or slightly declining demand relative to previous survey periods and continued excess capacity. Demand for most high-tech products, such as computers and telecommunications equipment, was sluggish, although respondents noted a small sales pickup and rising capacity utilization for semiconductor producers. Producers of other manufactured products also saw weak conditions in general, with demand for commercial aircraft reduced by ongoing problems in the airline industry.
Agriculture and Resource-related Industries
Demand for most District agricultural and resource products was solid, although some producers faced adverse supply conditions. Yields and sales of fruits, vegetables, and nuts were high, spurred in part by strengthened export demand. However, drought conditions in some areas have restricted the supply and raised the price of various grains; this in turn has spurred ranchers to sell beef cattle earlier than preferred due to increased feed and grazing costs. In addition, fires in Oregon have hampered logging operations there. In the markets for natural gas and electricity, contacts noted that supply conditions are adequate to meet demand and keep prices stable in the near term.
Real Estate and Construction
Reports suggest that commercial real estate markets are at or near bottom, while residential market activity remains at high levels but may have peaked. Vacancy rates on commercial and industrial space were flat or increased at a slower pace than in previous periods. Some of the weakest markets, such as the San Francisco Bay Area, saw further declines in rental rates on commercial space. By contrast, industrial rents reportedly were flat or up slightly in most areas. Commercial construction activity remained at very low levels. On the residential side, sales activity and prices continued at high levels throughout the District, although the momentum for further expansion waned in late July and August. Housing starts declined a bit in some areas, and despite the reduction in inventory, the pace of housing price increases slowed. Construction capacity and materials were readily available, and material costs remained low.
Financial institutions experienced mixed credit conditions. Despite amply available credit, business loan demand was weak, and respondents noted heightened competition among lenders for low risk loans in several District markets. At the same time, banks tightened underwriting standards for riskier business borrowers. In contrast to business loans, household loan demand remained strong, due to low interest rates and robust mortgage originations and refinancing activity.