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Twelfth District economic activity continued to expand at a moderate pace during the reporting period of late April through the end of May. Price increases for final goods and services remained limited, and upward pressures on wages were subdued on balance. Sales of retail items rose further, while demand for business and consumer services was mixed. District manufacturing activity also was mixed but appeared to expand overall. Agricultural producers reported strong sales, and extraction activity rose for providers of natural resources used for energy production. Activity in District housing markets remained lackluster, while demand for commercial real estate showed signs of improvement. Contacts from financial institutions reported further increases in loan demand.
Wages and Prices
Price inflation was limited for most final goods and services during the reporting period, with the notable exceptions of food and gasoline. Although the prices of a wide range of commodities and raw materials remained elevated, the pass-through to final prices has been limited. For most retail goods and services, tepid demand and robust competition continued to hold down final prices.
Upward wage pressures were quite modest in general. Although hiring activity has picked up, high unemployment and ample labor availability continued to limit the pace of overall compensation gains throughout the District. The primary exception continued to be workers with specialized technical skills, particularly engineers and specialists in information technology, for whom wage gains remained significant in several parts of the District.
Retail Trade and Services
Retail sales rose further on balance. Although consumers' focus on necessities continued, the reports noted a slight shift back toward discretionary spending. Modest improvements in sales were reported for discount chains as well as for traditional department stores, and inventories generally were at or near desired levels given the pace of sales, enabling many retailers to reduce their reliance on promotional activities. For retailers of big-ticket items such as major appliances and furniture, however, sales remained somewhat weak. Similarly, sales were largely flat for grocers. Demand for new automobiles continued to strengthen, although sales growth was restrained somewhat by high fuel prices and shortages of new Japanese-made vehicles associated with the recent natural disaster in that country. The availability of used vehicles tightened further, primarily for imported models, which has propped up their sale prices and trade-in values.
Demand for business and consumer services was mixed. Providers of professional services such as legal and accounting reported little change in activity since the prior reporting period. Sales growth remained strong in the Internet and digital media sectors, and demand for electricity by businesses and households expanded further. Activity waned somewhat for providers of transportation services, with contacts noting a slowdown in cargo traffic at Southern California seaports. Health-care providers noted further moderation in the demand for their services. Travel activity continued to improve in much of the District, reflecting growth in business travel as well as tourism.
District manufacturing activity posted further net gains during the reporting period of late April through the end of May. Manufacturers of semiconductors and other technology products reported continued growth in new orders and sales as well as high levels of capacity utilization, with few supply constraints arising from the crisis in Japan. Activity fell slightly for metal fabricators, as demand growth eased in the wake of strong gains in preceding months. Production rates remained solid for makers of commercial aircraft and parts, with modest growth in new orders adding to an existing order backlog. Capacity utilization rates dropped a bit for petroleum refiners, as domestic demand for gasoline stalled in response to elevated prices. Reports from food and beverage manufacturers indicated that demand for their products was largely stable or up somewhat.
Agriculture and Resource-related Industries
Sales of agricultural products were robust, and extraction activity of natural resources used for energy production expanded further. Orders and sales continued to grow for a wide variety of crop and livestock products. However, contacts noted some supply constraints: input costs have risen overall, and unseasonably cold weather delayed the development of some crops in California and the Pacific Northwest. Demand for natural gas continued to expand, propelled in part by cold spring weather, and oil extraction activity grew further in response to rising overseas demand.
Real Estate and Construction
Demand in District residential real estate markets was largely unchanged at very low levels, while conditions improved slightly in commercial real estate markets. The pace of sales for new and existing homes in the District continued to be very weak on net, with distressed properties and entry-level homes reportedly dominating the sales mix in some areas. As a result, new home construction remained moribund and home prices were stable to down. By contrast, conditions continued to be stronger in apartment markets, particularly in the Seattle area: rental rates there reportedly are growing at an annual rate of 10 to 15 percent, spurring significant increases in construction activity. Vacancy rates for office and industrial space stayed elevated throughout the District, but further improvements in demand were noted for several major markets. This was particularly the case in the San Francisco Bay Area and Seattle, with revived developer interest in new construction reported for the latter area.
Reports from District banking contacts indicated that loan demand and overall credit quality rose modestly since the last reporting period. Businesses in some areas have exhibited a slight increase in their willingness to engage in expansionary capital spending, which caused demand for commercial and industrial loans to rise. Demand for consumer credit remained largely stable. Despite improvements in overall credit quality, lending standards remained relatively restrictive for many types of consumer and business loans. However, contacts reported that competition among lenders to extend credit to well-qualified small and medium-sized businesses has continued to intensify, placing downward pressure on rates and fees. Contacts also pointed to continued growth in venture capital financing activity, driven primarily by investments in the Internet and digital media sectors.