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Reports from Twelfth District contacts indicated a solid, but tempered, pace of economic expansion in the recent survey period. Retailers reported moderate sales growth during the holiday season, slightly below expectations. Manufacturing activity remained weak, although producers of some high-tech products noted a pick-up in demand. District agricultural conditions showed little improvement during the recent survey period, as low prices and bad weather continued to damp profits. Demand for residential and commercial real estate cooled slightly, but respondents noted that construction activity remained at high levels. Financial conditions remained strong throughout the District, although commercial borrowers faced tighter terms.
District respondents expect a solid but tempered performance from the national economy and their respective regional economies in the coming year. About 60 percent of the respondents expect U.S. GDP growth to slow to its long-run average pace, leaving the national unemployment rate near its present level. Most respondents expect inflation to remain stable, although about one-quarter anticipate an increase in inflation in coming quarters. A growing number of respondents (two-thirds) expect economic growth in their region to be at or below the national pace in coming quarters, as growth slows in regional business investment, housing starts, and consumer spending. Respondents have become more optimistic about regional trade balances; about 40 percent of District contacts expect regional trade balances to stabilize or improve slightly over the next year, compared to just 5 percent in the last survey period.
Retail Trade and Services
Respondents in most areas of the District characterized holiday retail sales as moderate and below retailers' expectations. Sales were strongest at "big box" retailers offering low-cost merchandise and at specialty stores catering to niche markets. Department store sales reportedly were flat or up slightly relative to last year, with heavy pre-Christmas discounting. Electronics, such as computers and DVD players, and home furnishings reportedly posted the strongest sales, as consumers took advantage of low prices and delayed payment options. Sales of specialty foods and fine wines reportedly were robust. Numerous contacts noted that internet shopping increased in their region. Service providers noted little change in the pace of growth in recent weeks, although tourism revenues continued to suffer from declines in East Asian visitors.
Reports on District manufacturing activity remained mixed. Contacts noted that the strong dollar continues to affect both current production and future orders of a diverse set of products including industrial machinery and equipment, electronic components, wood products, processed foods, and aircraft. Lumber producers noted that strength in the domestic housing market has kept demand high, but imports of less expensive materials are beginning to temper sales growth. Demand for final-use high-tech goods, such as personal computers and medical equipment, reportedly picked up in recent months, clearing away accumulated inventories and boosting production at some firms. In general, District manufacturers reported few difficulties obtaining materials or supplies and no capacity constraints. Respondents reported that while filling vacancies remains difficult, the pressure to raise wages for existing employees has eased recently.
Agriculture and Resource-Related Industries
Respondents reported little improvement in District agricultural conditions in recent weeks. In California, a cold snap severely damaged the state's citrus crop; early estimates suggest that between 50 and 70 percent of the orange crop was damaged. In other areas of the District, low prices for cattle, hogs, wheat, feed grains, and potatoes continued to squeeze profits. Respondents reported that the price of wheat and some feed grains have declined to the point that producers cannot cover production costs. On the bright side, some contacts reported that export orders strengthened in recent weeks, particularly for meats.
Real Estate and Construction
Real estate construction and sales remained at high levels in most District states, although the pace of growth reportedly slowed. Contacts reported that home prices and rental rates have begun to level off in most markets, tempering development of new properties. Demand for commercial properties reportedly cooled in recent weeks, particularly in Northern California and the Pacific Northwest. Despite the slowdown, commercial construction activity remained strong in most areas of the District, as contractors worked on a backlog of projects acquired during the past twelve months.
Twelfth District banking conditions remained strong in recent weeks, although commercial borrowers faced tighter terms. Respondents reported that bank capital and liquidity were ample, and that competition for quality borrowers remained intense. However, concerns about credit quality, particularly among commercial borrowers, continued to restrain bank lending.