Reports from Twelfth District contacts indicate continued sluggish economic
growth in much of the region during January and early February. While prices
remained stable for most consumer goods and services, prices for energy and
health care increased substantially. In labor markets, firms faced limited upward
pressure on wages and salaries but noted continued rapid increases in costs
for employee benefits. Many respondents pointed to uncertainties, due in part
to geopolitical risks, as having negatively affected both consumer and business
spending. Consumers appeared more cautious concerning expenditures on vehicles
and travel. Conditions in District manufacturing generally remained weak with
limited signs of improvement. The agricultural sector benefited from improved
exports and oil and natural gas producers operated at high levels of capacity.
Contacts reported continued strength in residential real estate, while commercial
real estate remained weak. Bank lending continued recent patterns of rapid growth
in residential mortgage loans and weak demand for business credit.
Prices and Wages
Respondents in the District reported that consumer prices generally remained
stable in recent weeks. Notable exceptions were energy prices, reflecting jumps
in fuel costs, and rapid increases in health-care prices. Contacts noted that
retailers had very little pricing power in the face of the slow economy, extensive
discounting was common among retailers and automakers.
Persistent weak demand and ample supply in labor markets continued to damp
wage and salary pressures in the District in recent weeks. Contacts characterized
wages as flat or up modestly. However, health care and other benefits expenses
continued to increase rapidly.
Retail Trade and Services
District respondents reported that the generally sluggish economy and uncertainties
related to possible military action in Iraq contributed to lackluster performance
in the retail sector during the most recent survey period. Sales of new and
used vehicles slowed in January and early February, both relative to December
and to a year earlier. Automobile dealers noted that, with the rise in gasoline
prices, inventories of SUVs and light trucks rose in several markets. Indicative
of more general weakness in retail, sales of apparel reportedly were flat.
District respondents reported continued weak demand for many services in January
and early February. Demand for accounting and legal services remained soft in
parts of the District; in California, a large law firm catering to the technology
sector closed. Transportation providers faced higher costs from rising fuel
prices and uncertain future demand associated with a potential war in Iraq.
Conditions in District travel and tourism were mixed. In Hawaii, for example,
both domestic and international tourism continued to improve; however, the improvement
was below expectations and the level of international tourism still has not
recovered fully after slumping in 2001. Looking forward, District travel and
hospitality industry contacts indicated that adverse effects on tourism from
a potential war would more than offset any positive effects associated with
the weakening value of the dollar in the foreign exchange market.
Conditions in manufacturing generally remain weak in the District, with respondents
noting limited improvement in January and early February. Demand conditions
remained relatively stable in biotech industries, while weakness persisted in
telecommunications. Respondents noted that semiconductor sales were flat to
up modestly and inventories rose slightly. Capacity utilization in parts of
the high-tech sector improved; utilization rates reportedly were high and, in
some cases, capacity is being expanded for cutting edge technologies. Overall,
however, District firms remain cautious about spending. District contacts reported
that manufacturers, especially those facing rising energy costs and uncertainties
related to a potential war, have postponed spending and investment decisions.
Contacts also cited disruptions to businesses from the call-up of military reservists.
However, several contacts noted that defense contractors in Southern California
and other areas of the District would benefit from the federal government's
increased spending on defense and homeland security. Several respondents reported
that the fall in the value of the dollar over the past year has positioned District
manufacturers to compete more effectively against foreign firms in the months
Agriculture and Resource-related Industries
The agricultural sector, on balance, benefited from increased exports, while
the oil and natural gas extraction sector was marked by high capacity utilization
and rising prices. Prices for specialty farm products have been mixed in recent
weeks. Prices for raisin grapes fell considerably, while prices for certain
nut crops were higher than they were a year ago. Respondents noted that the
depreciation of the dollar contributed to higher export volumes for a variety
of agricultural products, notably nut crops and beef. High levels of capacity
utilization and reduced inventories in oil and natural gas production continued
to put upward pressure on energy prices. Ongoing and potential disruptions of
foreign energy supplies also affected energy prices.
Real Estate and Construction
Overall conditions in District real estate remained mixed, with commercial real
estate markets still in a serious slump and residential markets still showing
strength in recent weeks. Commercial office vacancy rates remained high and
continued to edge up as leases expired. Rental rates fell, most notably in the
San Francisco Bay Area, and new office construction is not expected to pick
up for some time.
In contrast, contacts indicated that residential housing markets across much
of the District remained robust in January and early February. Sales of low-to-median
priced homes remained high in most of the District, especially in Southern California
and Hawaii, although the pace of sales and of price appreciation has moderated
in some areas. Throughout the District, contacts noted that markets for high-end
homes had cooled off. Respondents attributed continued strength in overall home
sales primarily to low mortgage interest rates.
District banking industry respondents noted strong performance among community
banks in January and early February, with most depicting asset quality as remaining
good. Residential mortgage loan growth rates continued to climb. Home mortgage
refinancing activity was very brisk, though some lenders reported the pace of
applications fell short of the pace of loan closings. Business lending remained