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Reports from Twelfth District contacts suggest that economic growth was sluggish
during the period from March through early April, with limited negative effects
arising from the start of military operations in Iraq. Price and wage pressures
were minimal, and retail gasoline prices largely remained at elevated levels.
General retail sales held up on net, though they appear to have weakened a bit
toward the end of the survey period, partly due to concerns about the war in
Iraq. The war, along with the East Asian outbreak of the respiratory ailment
"SARS," had a discernible negative effect on travel and tourism activity, especially
visits from abroad. Demand for high-tech equipment and other District manufactured
products fell slightly on net, and respondents noted significant excess capacity
for various products. Sales of agricultural products were solid, due in part
to strong export demand, and contacts reported capacity expansion in the fuel
and energy sectors. Although commercial real estate markets weakened further,
home demand was strong, although slower activity was reported in some markets.
Banks and other financial intermediaries saw continued weak demand for business
loans and strong demand for residential mortgages.
Prices and Wages
District contacts reported little upward pressure on wages and prices in the
most recent survey period, except for increases in employer benefit costs and
the price of transportation services. Despite a recent decline in oil prices,
retail fuel prices fell only slightly from elevated levels established in early
March. Providers of transportation services passed on some of the increased
fuel costs to customers, and shipping costs rose due to delays associated with
tightened security procedures related to imports. More generally, upward price
pressures were quite limited, as stiff competition forced many retailers and
service providers to offer their products at discounted prices. Although rising
prices for health insurance increased employer costs for employee benefits,
wages reportedly were flat to down a bit, as most labor markets were characterized
by significant excess supply.
Retail Trade and Services
Demand for retail goods and services weakened a bit compared to the previous
survey period. Retail sales were largely stable on net, and contacts noted that
consumer spending held up better after the start of the war in Iraq than it
did following the start of Operation Desert Storm in 1991. Sales of new and
used automobiles and light trucks were described as robust for the survey period
as a whole, though some dealers noted a pause in activity when the military
conflict began. Retail inventories in general have been kept lean in recent
weeks, and one contact reported cancellations of apparel orders by some department
Travel and tourism activity fell noticeably in some areas in response to the
start of the war and the outbreak of the SARS epidemic in East Asia. Respondents
reported extensive reservation cancellations and lower hotel occupancies in
Los Angeles, Hawaii, and other areas, largely due to a decline in visitor arrivals
from East Asia. Moreover, airlines cut flights on selected Asian and European
routes in response to a decrease in bookings and lower passenger load volumes.
Domestic travel also remained weak. Outside of travel-related industries, service
demand was largely stable, with robust conditions reported for health care and
District manufacturers struggled with somewhat weaker sales and significant
excess capacity during the survey period. Demand for most technology products
was sluggish and perhaps fell a bit, as businesses further delayed upgrades
to their existing stocks of computer, networking, and communications equipment.
Capacity utilization reportedly was low for all but the most advanced technology
products, and utilization was well below preferred levels in other industries,
such as machine tools and food processing. Inventories of unused planes were
at high levels, which undercut demand for new commercial aircraft. Due to high
production and a steady flow of Canadian imports, lumber prices reportedly were
at twelve- to fifteen-year lows, which may lead to curtailed domestic production
going forward. Among manufacturers reporting modest strength, such as providers
of construction equipment and building materials, demand increases have been
met largely through the use of overtime hours rather than through the hiring
of new employees.
Agriculture and Resource-related Industries
District agricultural and resource-related businesses reported solid demand
in recent weeks. Sales and prices of tree fruits and nuts were strong, spurred
in part by continued strong export demand, and favorable weather produced healthy
growing conditions for many West Coast crops. Contacts noted substantial new
investments and expanded capacity for extraction of oil and natural gas, along
with plans for new electrical generation facilities in some areas.
Real Estate and Construction
Demand for commercial real estate remained stagnant in most areas, while residential
market activity continued at high levels overall, despite scattered signs of
cooling. Office vacancy rates generally remained high, and rental rates fell
further in some areas. However, vacancy rates for commercial space improved
a bit in Southern California and Hawaii, where overall economic conditions have
been relatively favorable. Home sales continued at a rapid pace in most areas,
fueled in large part by low mortgage interest rates. However, the pace of sales
growth and price appreciation fell slightly in some areas, most notably in Utah.
Moreover, citing a weak economy and economic uncertainties related to the war
in Iraq, a few District developers have delayed planned construction projects
in recent weeks, including several multifamily housing developments that were
put on hold in Salt Lake City.
Contacts reported generally weak loan demand by businesses but strong demand
for new residential mortgages and extensive refinancing activity for residential
and commercial real estate loans. In contrast to most areas, banks in Southern
California and Hawaii saw steady growth in commercial loans. The volume of residential
mortgage loans remained high but fell a bit in some areas, notably in Utah.
Credit was amply available for low-risk borrowers throughout the District.