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The Twelfth District economy continued to expand at a solid pace in late November
and December. Contacts reported little or no pickup in the pace of overall price
increases. The pace of cost increases for selected inputs eased, albeit from
high levels. Several contacts noted that some of the higher input costs were
passed on to consumers, though efficiency gains helped hold down overall production
costs. Wages and salary pressures remained modest but up slightly overall. Strong
export growth contributed to improving demand conditions in most sectors. Holiday
retail sales, on balance, were up compared with last year, with retailers stepping
up discounting in late December. Manufacturers, agricultural producers, and
transportation and other service providers generally reported strong demand.
Activity in District residential real estate markets remained robust, though
it moderated in some areas. District banks reported overall solid loan demand
and good credit quality.
Wages and Prices
The overall pace of price increases remained modest in recent weeks. District
producers reported that, although the level of certain input costs remained
high, increases in the cost of energy and building materials have eased from
previous rapid rates. Several businesses indicated they were passing along at
least some of the higher input costs to consumers. At the same time, several
District businesses reportedly have experienced efficiency gains in their production
processes, which served to hold down overall cost increases.
Contacts noted little change in labor market conditions. Reports indicated
little or no difficulty filling positions, with the exception of certain high-skilled
jobs in selected industries. Wages and salary pressures remained modest but
up slightly overall; most District businesses reported that increases in benefits
costs continued to push up total compensation bills.
Retail Trade and Services
Reports from District retailers indicated generally solid retail sales for the
holiday season as a whole, with both dollar sales and unit sales up relative
to last year. The strength of demand during the holiday season was broad-based
across establishment types, with sales at discount stores, department stores,
and establishments specializing in luxury products reportedly all performing
well. Contacts noted that holiday season discounting was generally more restrained
than last year, though many retailers increased discounting as the end of the
season drew near. Perhaps as a result, sales performance was reported to have
been considerably better toward the end of the holiday season than at the beginning.
Overall, most contacts reported that holiday sales met expectations, leaving
retail inventories in balance heading into 2005.
Sales of autos generally were solid during the survey period; foreign makes
reportedly sold considerably better than domestic brands, despite the dollar's
recent declines relative to other currencies. Final sale prices and profit margins
remained restrained as a result of intense competition, particularly among domestic
automakers.
District service providers reported a further strengthening in demand in recent
weeks. For example, demand for health-care and transportation services was solid,
and service providers operated at high utilization rates. District travel and
tourism activity was healthy in most areas, with increases in both domestic
and international traffic. In particular, the number of Japanese visitors to
Hawaii have returned to pre-September 11 levels, boosting activity there. Hotel
occupancy and average daily room rates continued to improve in many markets.
Manufacturing
Most District manufacturers reported strong demand for their products in late
November and December. Increased foreign demand for various products contributed
to overall improvements in business conditions. Makers of machine tools reported
strong demand for most of their products; the market for certain inputs such
as steel plates is characterized by tight inventories, strong demand, and rising
prices. Robust construction activity continued to drive demand for wall board,
insulation, and other building products in recent weeks. Robust demand conditions
also characterized the food processing industry. Transportation equipment makers
reported that demand conditions improved; new orders edged up slightly in recent
weeks. In IT manufacturing, semiconductor orders and sales generally were solid;
however, capacity utilization of chip makers dropped slightly from its already
high level.
Agriculture and Resource-related Industries
District providers of agricultural and resource-related products indicated a
strengthening in demand during the most recent survey period. Agricultural exports
rose in recent weeks. District orders and sales of tree nuts especially were
high, attributable in part to favorable public announcements regarding nutritional
value and in part to constrained supply in other nut-growing regions. Contacts
reported that prices for most agricultural products increased moderately in
recent weeks. Overall, respondents indicated strong underlying demand for natural
resources. Contacts reported a slight decline in wholesale prices for natural
gas, while retail prices generally remained stable. On the other hand, consumers
in the Pacific Northwest faced higher electricity prices as the effect of drought
conditions on hydroelectric generation more than offset the effect of mild weather
on demand.
Real Estate and Construction
Demand for residential real estate generally remained robust in recent weeks.
Sales of new and existing homes increased throughout the District and home-price
appreciation remained solid, particularly in certain areas such as Hawaii. However,
in some areas the pace of home sales growth and price increases slowed from
previous rapid rates. The overall robust demand for new homes and home improvements
has kept overall construction activity at high levels. District commercial real
estate markets generally improved in recent weeks; contacts reported that office
vacancy rates continued to fall, and rents increased moderately in most markets.
Financial Institutions
District banking contacts indicated overall solid loan demand and good credit
quality in late November and December. A very competitive environment generally
has kept profit margins low in the banking sector recently, although several
contacts reported that profit margins have improved. Commercial and industrial
lending edged up slightly in recent weeks. Demand for construction, commercial
real estate, and residential loans slowed a bit in some areas but remained at
high levels overall. Several contacts noted increases in merger and acquisition
activities among District firms.
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