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Summary
Reports from contacts indicate that the District economy continued to expand
at a solid pace from early June through mid-July, although growth appeared to
have slowed slightly compared with the previous survey period. Compensation
and final prices rose modestly in general; however, there were scattered reports
of increased wage pressures for selected types of workers. Consumer demand for
retail items moderated compared to the previous survey period, while demand
for most services remained strong. Manufacturing output continued to expand,
but the pace slowed compared with earlier this year. Sales were brisk for most
agricultural products. Demand for residential real estate remained robust, and
demand for commercial real estate was stable or up a bit. District banks reported
solid demand for all loan categories and good credit quality.
Prices and Wages
District contacts reported modest price inflation during the survey period.
Fuel and energy prices fell back somewhat, but rising prices for steel, cement,
and some raw materials boosted production costs in some industries. Some contacts
noted increased pricing power relative to earlier in the year, but in general
vigorous competition still limited firms' ability to pass cost increases on
to final prices.
Wage and salary pressures were modest overall. However, shortages of qualified
job applicants and increased outside competition for existing employees generated
notable wage and salary increases for skilled occupations in a number of industries,
including construction, manufacturing, financial services, and technology services.
Contacts noted that where wages have been rising, productivity gains generally
have been adequate to hold constant or reduce labor costs per unit of output.
There were a few exceptions, notably for some firms in the banking, health-care,
and construction industries, where productivity growth did not keep pace with
wage gains and rising labor costs were absorbed into profit margins or passed
on to final prices. Some contacts noted recent or anticipated slowing in the
pace of productivity gains in their industries. Respondents in all sectors reported
that rising health insurance costs made a significant contribution to increases
in overall compensation costs.
Retail Trade and Services
Contacts reported slight moderation in retail sales compared with the previous
survey period. Automobile sales fell in June. The decline was centered on domestic
makes, for which inventories reached very high levels. However, overall sales
recovered somewhat in early July. In retail, a contact from a major department
store chain noted that "sales have softened" compared with earlier in the year,
although other retail contacts reported further sales increases.
Service providers saw strong demand throughout the District. Robust sales were
reported for providers of advertising, communications, entertainment, and health-care
services. Shipping traffic through District ports expanded, spurred by vigorous
international trade flows. District travel and tourism activity strengthened
further. Hawaii's tourist traffic has been growing at a double-digit pace compared
with a year earlier, and hotel occupancy rates there recently regained their
highs from the year 2000. Hotel occupancy rates also rose in San Francisco.
Manufacturing
District manufacturers reported generally solid demand for their products, although
growth slowed in some sectors. Semiconductor sales grew at a slower pace and
manufacturers' inventories rose slightly, but capacity utilization in the industry
remained high. Demand was strong for some categories of communications equipment,
including items used for high-speed Internet access and office computer networks.
Metal fabricators, transportation equipment makers, and manufacturers of wood
products operated at high levels, although new orders slowed slightly. Demand
remained strong for apparel and textile products.
Agriculture and Resource-related Industries
Contacts reported brisk sales for District agricultural products. Demand for
beef cattle and other livestock has been especially strong, reportedly pushing
prices to unusually high levels. Berry crop yields were very high in the Pacific
Northwest, but solid demand kept prices firm. Similar strength was evident for
the California nut and grape crops, although sales reportedly were weak for
some other fruit crops in that state. Demand for dairy products remained strong,
and one contact noted that milk prices were at five-year highs.
Real Estate and Construction
Demand for residential real estate remained vigorous, and reports indicated
modest further improvement on the nonresidential side. Sales of new and existing
homes were rapid in most areas, especially in Southern California and Hawaii,
where demand growth noticeably outstripped supply growth and rapid price appreciation
continued. However, reports indicated that the pace of home sales and construction
starts has leveled off in some parts of the District, including Utah and the
Seattle area. Demand for residential rental properties weakened slightly in
the Los Angeles area. On the commercial side, demand for office space improved
a bit further in some areas, although prices and rental rates remained largely
flat. In the population centers east of Los Angeles, demand for commercial real
estate was very strong, with prices on industrial space reportedly up 40 percent
from a year earlier.
Financial Institutions
District banking contacts reported strong loan demand and good credit quality
on existing loans. Business loan demand increased further in most areas, although
contacts in a few areas noted a recent drop due to reduced business optimism
about the likely payoff to capital improvements. Lending for new residential
mortgages fell somewhat but remains quite high. Several contacts noted significant
increases in venture capital funding and planned initial public offerings.
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