October 27, 2004
Federal Reserve Districts
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Reports from contacts indicate that economic activity expanded at a solid pace in the District in September and early October, although growth appears to have slowed slightly compared with the previous survey period. Price inflation for final goods and services remained low overall, but prices of energy and some key construction materials rose further. Upward wage pressures were limited; however, rising costs for health insurance benefits continued to push up total compensation costs. Sales of retail goods were solid and demand for services generally was strong. Manufacturing activity was mixed in recent weeks, with some sectors reporting solid growth and others noting some softening. Contacts reported improved demand and sales for District agricultural and resource products. Residential real estate activity remained robust in nearly all District markets with moderation in only a few areas. Conditions in commercial real estate were stable, with little movement in vacancy rates or lease prices. District banking contacts reported solid real estate lending and modest improvements in commercial and industrial lending.
Prices and Wages
District contacts reported low price inflation overall, peppered with some isolated pockets of price increases. In particular, prices for fuel and some key construction materials increased sharply. In response to higher energy prices, some public utilities have obtained or applied for rate increases. Generally slack labor markets are holding down wage inflation; however, many contacts continued to report substantial increases in health insurance premiums, boosting total compensation costs.
Retail Trade and Services
Contacts reported generally solid retail sales in most areas during the most recent survey period. However, some retailers raised concerns about inventory levels of apparel, as sales have reportedly been softer than expected. Sales of automobiles and light trucks jumped in September, spurred by generous incentives for some domestic brands. That said, there remained some unwanted inventories on car lots in the District.
Service providers throughout the District reported robust demand. Sales of advertising, communications, entertainment, and health-care services remained strong in recent weeks. Additionally, District seaports handled very high volumes, and backlogs worsened in Southern California. Travel and tourist activity reportedly was robust, especially in Southern California, where hotel occupancy rates were in the 90 percent range. In Hawaii, the tourism sector benefited from higher numbers of both domestic and international visitors.
District manufacturers reported mixed conditions in September and early October. Sales of lumber and wood products remained strong; prices edged down slightly as supply increased to meet the high demand. New orders for machine tools showed some softening. Respondents at IT firms other than semiconductors noted that demand has improved modestly but less than expected. Although capacity utilization for semiconductor makers was at high levels, there were selected pockets of softening sales and unintended inventory accumulation.
Agriculture and Resource-related Industries
In the District agricultural sector, contacts reported improved demand and sales for most agricultural products, including beef cattle, cut flowers, tree fruits, avocados, and cotton. In the resource sector, contacts reported that electric utilities continued to make investments to expand generation capacity. Although prices for natural gas remained elevated in recent weeks, inventories of natural gas were at levels deemed adequate for the upcoming winter heating season.
Real Estate and Construction
District residential real estate markets remained robust in recent weeks with only a few exceptions. Home demand and sales were especially strong in California's central valley, where prices are much lower than in that state's coastal communities, and in Arizona, where affordability remains high. Additionally, in Hawaii, high demand continued to push prices up rapidly. By contrast, demand and sales softened in parts of Southern California, as witnessed by increased time on the market and prompting builders to increase incentives. Demand for new homes and home improvements kept overall construction activity at high levels; contacts in all areas reported further shortages of steel, cement, and other construction materials, which increased building costs and caused construction delays. On the commercial side, contacts generally noted little change in market conditions, with continued high vacancy rates reflected in relatively flat prices and rental rates.
District banking contacts reported overall solid loan demand. One area where demand for loans remained particularly robust was real estate lending. District commercial and industrial lending improved slightly, albeit from a low base. Several bank contacts noted that banks have faced increasing challenges in finding qualified borrowers; however, overall loan quality remained high. Banking contacts also noted that ample credit was available.