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Economic activity in the Twelfth District expanded at a solid clip in the most recent survey period, with strength in housing markets and consumer spending offsetting moderate slowing in manufacturing activity. District agricultural producers faced poor weather in California and low prices for some products. Expansion of real estate sales and construction activity was strongest in California, but activity generally remained at high levels in other parts of the District. Various types of labor remained in short supply in many areas, with additional labor market tightening reported for California. Upward price pressure was limited overall, but respondents noted significant increases in the purchase price of some services.
Business Sentiment
Respondents in general expect solid performance from the national economy and their respective regional economies during the next four quarters. Over two-thirds of respondents expect national GDP to expand at its long-run trend pace. About half expect national unemployment and inflation to remain stable, although just under 45 percent expect inflation to rise, which is a more pessimistic view of inflation prospects than reported at the beginning of the year. Two-thirds of respondents expect stronger economic growth in their regions than in the rest of the nation, with about 60 percent expecting stability in local business investment and consumer spending; however, three-quarters expect further deterioration in their region's foreign trade balance.
Retail Trade and Services
Retail sales were robust overall. Automobiles sold well, as purchases of domestic brands were stimulated substantially by manufacturers' price breaks and financing incentives. Reports also indicated solid sales of other retail items in most areas. Inventories were at moderate levels for most retail goods throughout the District, with the notable exception of excess inventories for computers and some consumer electronics products. Although prices of imported products have fallen, strong consumer demand has kept District retail prices flat in general.
Demand for business and consumer services was strong. Sales of media and cable television services were rapid, and abundant supply kept prices stable. Recent tourist traffic and hotel occupancy have been high in Southern California; however, hotel bookings for October appear weak there, reportedly due to corporate caution regarding discretionary travel spending. Respondents noted significant cost and price increases for various services, such as health care, trucking, and eastbound ocean shipping.
Manufacturing
District manufacturing activity expanded, but production has decelerated for some products. A respondent from Southern California reported stable sales and prices of non-ferrous metals and fabricated metal products, with moderate order backlogs. A Pacific Northwest paint manufacturer reported sales growth of 12 percent and profit growth of 15 to 18 percent over last year. In contrast, supply growth has outstripped demand growth for computer components and lumber. Although domestic demand and sales remain strong for these products, overall sales have suffered a moderating impact from the East Asian economic slowdown. Prices of computer components continue to decline, and respondents noted lumber and timber price declines of 15 to 3 percent during the last six months. Respondents also noted a recent pickup in layoffs and reduced hiring plans by some high-tech manufacturers in the San Francisco Bay Area.
Agriculture and Resource-Related Industries
Conditions in District agricultural markets were mixed. Early season progress of the grape and cherry crops in California's Central Valley has been hampered by heavy spring rains and unseasonably cold weather, and yields are expected to be lower than in previous years. Sale prices for wheat and potatoes remain low. Despite low prices for feeder grain, beef cattle are selling at losses of $50 to $150 per head in Arizona; however, meat sales to Mexico and Japan have improved.
Real Estate and Construction
Real estate market and construction activity was high in most areas of the District, with slight slowing in some areas but a continued pickup in all areas of California. Home sales reportedly have been at a record pace in the Seattle, Washington, area during the past six months. In contrast, construction activity and home price increases in Oregon have slowed compared to last year. Sales of single family homes remained high in Utah, but housing starts are down compared to last year, and an excess of rental units is holding rents down in Salt Lake City. Both residential and nonresidential construction and sales activity grew in all major regions of California. Real estate price and rent increases have accelerated in the state; for example, rental rates for Class A office space in San Francisco reportedly rose by 25 percent during the past six months. Respondents in California also noted rising scarcity of construction labor, with one San Francisco Bay Area report noting that contractors are bringing labor in from other states.
Financial Institutions
Banks reported robust loan demand and generally healthy conditions. Growth in demand for consumer loans remains slower than growth in real estate, commercial, and industrial loans. Respondents noted that stiff competition prevented improvement in loan margins and underwriting standards, and some banks have been pressured by tight labor supply and rising wages.
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Dallas