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Most contacts from the 12th District reported strong economic growth in their areas and industries in recent weeks. The District manufacturing sector continued its solid expansion, and the pace of retail goods and service sales was brisk. Construction and real estate sales activity was robust in most regions, although some deceleration was reported in several fast-growth states, and the Southern California market continues to be weak. Banking respondents reported good conditions for their industry throughout the District. With regard to the outlook, respondents' generally sanguine views were tempered only by expectations of increasing inflation.
Although wage and price pressures in the District reportedly were moderate overall, upward pressure on the wages of entry-level workers in some areas recently has been added to existing upward pressure on wages for some categories of highly skilled workers.
District respondents expect the performances of the national economy and their respective regional economies to remain on track in the near term. Over half expect national GDP growth to continue at about its long-run potential, with most of the remaining respondents expecting improvement rather than deterioration. Most also expect their region to outperform the nation in coming months. However, respondents' inflationary expectations worsened in the most recent survey period, with 56 percent expecting inflation to accelerate during the next 12 months, compared to 39 percent in the last survey period; only 5 percent in both periods expected an improvement.
Retail Trade and Services
Demand for retail goods and services was solid overall. Sales were particularly rapid at large grocery and drugstore chains, though a Pacific Northwest respondent noted flat demand for consumer sporting goods. In the services sector, firms that provide services to other businesses did particularly well in the recent period. District software companies continued to expand, benefitting from gains in both domestic and international markets; the primary beneficiaries are in the Seattle, Washington, area and in California. Also in California, demand for telecommunications services was very strong, with the introduction and expansion of new products helping to fuel an ongoing surge in this sector. More generally, continued tightness in retail and related labor markets reportedly has led to noticeable wage pressures for entry-level workers in several states.
The District manufacturing sector expanded further in recent weeks. Employment, sales, and investment in aircraft production and related industries expanded at a rapid pace in Washington State, due largely to a push to fill a substantial order backlog at Boeing. In California, makers of metal products expanded their employment and sales at a healthy pace, and reports indicate similar strength in chemical production. Furthermore, manufacturers of high-tech electronics and computer products did well overall in that state and in most of the rest of the District. Although the District high-tech manufacturing sector had been held back somewhat by saturation in the computer memory chip market during much of 1996, several respondents reported recent signs of bottoming-out or slight recovery in this sector. Respondents also noted rising labor market tightness for skilled high-tech workers in several areas, and an Oregon respondent noted the need for deferred vacation plans to meet orders at local high-tech firms. In another sign of strength in the Pacific Northwest, employment and output by lumber producers reportedly have picked up.
Agriculture and Resource-Related Industries
Reports indicate generally good conditions for District agricultural products. Sales of various California crops were stimulated by rising export demand, largely coming from China and other countries in Southeast Asia. California wheat producers had a good harvest, and they benefitted from high prices arising from low worldwide supply; high prices also benefitted Washington wheat growers. In contrast, although increasing District beef exports to some countries helped to offset a recent decline in beef exports to Japan, the glut in the District beef market continued, with feed cattle prices sitting as much as 40 percent below break-even levels.
Real Estate and Construction
Construction activity and real estate sales generally were strong in the District, with the exception of somewhat weak markets for residential property in California. Activity in that state was mixed, with the southern portion of the state still lagging behind the northern portion.
Substantial residential building activity, home price appreciation, and rent increases were reported for Silicon Valley, the high-tech manufacturing center in the southern part of the San Francisco
Bay Area, and some pickup in permits for lower-priced "entry level" homes was reported for Southern California. For California as a whole, however, any existing strength primarily was in nonresidential markets; residential construction and sales remain low at the state level. Although building and sales activity continued at high levels and wages for construction workers rose noticeably in the District's fast-growth intermountain states and Oregon, several respondents in these states reported recent slowing in residential construction activity and plans. Reports also suggested some slowing in commercial construction in Idaho, Arizona, and Nevada.
Respondents representing banks and savings and loans reported strong loan demand and generally good credit conditions throughout the District. Reports from Southern California suggested somewhat improved conditions there, with increased loan demand at banking and thrift institutions; however, delinquencies also have increased a bit. San Francisco Bay Area banks registered strong performance, although some deterioration in consumer loan quality was reported. Elsewhere in the District, financial institutions continued to do very well, despite sharp competition for loans.