June 5, 2013
Economic activity in the Twelfth District expanded at a modest pace during the reporting period of early April through late May. Price inflation was subdued for most final goods and services, and upward wage pressures were limited overall. Retail sales were a bit soft, while demand for business and consumer services was mixed. District manufacturing activity rose on net. Production and sales of agricultural items increased modestly. Residential real estate activity expanded robustly, and commercial real estate activity trended up, although somewhat unevenly across geographic areas. Contacts from financial institutions reported slight increases in overall loan demand.
Prices and Wages
Price inflation was subdued for most final goods and services. Food industry contacts noted decreased prices of grain products but increased prices of some fruit and nut items. Contacts from retail grocery and restaurant chain establishments reported that overall food price inflation appears to have leveled off at a relatively modest pace. Fees for legal services declined a bit. Several construction inputs, such as cement, logs, and lumber, edged up further. However, prices for other wood products, steel, and some metals declined.
Contacts reported that wage gains were limited overall. Labor market slack continues to put downward pressure on wages and compensation for most sectors, occupations, and regions. However, various contacts indicated some upward wage pressure for skilled construction workers, software developers, and certain technical and managerial positions in high-tech manufacturing.
Retail Trade and Services
Retail sales were fairly soft overall. Sales of various digital and technology products slowed. Among computer and electronic products, sales of personal computers remained weak relative to sales of mobile computing devices, including smart phones and tablets. Demand for some gaming and entertainment products grew slightly, as did demand for apparel. Traditional retail grocers reported flat sales, with intensifying competition from discount and online retailers. Suppliers of food and beverage products noted increased sales. Automobile sales remained at high levels, although a shortage of used vehicles has restrained the pace of activity in some parts of the District.
Demand for business and consumer services was mixed. Food service providers reported strong sales on net, with some discount chains faring particularly well. Robust activity in Hawaii supported the District's travel and tourism sector, although there is some concern that the flow of international visitors could taper off in coming months due to potential weakness in the global economy. Travel and tourist activity in Southern California has declined a bit. Demand for both health-care and legal services was flat. Compared with previous months, contacts dialed back their expectations for robust growth of various technology services such as cloud computing and data processing this year.
Manufacturing
District manufacturing activity rose on net in the reporting period of early April through late May. New orders for electronic components were up a bit, and contacts indicated that they expect demand for semiconductors to pick up over the next couple of quarters. Pharmaceutical producers reported that innovative product launches contributed to continued modest gains for some firms, although overall activity seemed to be on a slight downward trajectory. Wood product manufacturers stated that demand grew further, fueled by rebounding domestic residential construction activity. However, contacts noted potential headwinds such as limited labor availability and transportation capacity. Demand for steel products used primarily in transportation infrastructure and nonresidential construction projects continued to increase, and capacity utilization ticked up.
Agriculture and Resource-related Industries
Agricultural sales and production increased modestly. Demand for most crop and livestock products grew further. Grain production was robust, but contacts reported some variability in vegetable production. Some contacts remained concerned that limited water availability in parts of the District could pass through to lower seasonal hiring and reduced agricultural output in coming months. Reports indicated that industry demand for electricity and natural gas grew robustly, although demand from households grew more sluggishly. While natural gas inventories rose slightly, the number of natural gas drilling rigs has fallen significantly since last year, due in part to the sustained low relative price of natural gas. Demand for gasoline was up in most regions.
Real Estate and Construction
Residential real estate activity expanded robustly, and commercial real estate activity trended up at a more moderate pace overall. Home sales climbed in many regions, and tight inventories coupled with healthy demand supported continued house price appreciation. Reports indicated that the number of foreclosed properties available for sale has continued to decline significantly. Construction of multifamily residential projects increased in many areas, driven by low vacancy rates and strong demand for rental properties. Commercial real estate leasing and development activity expanded in most major metropolitan areas. However, several contacts in less-urban areas reported persistently high vacancy rates for office properties. In some regions, construction of publicly funded commercial projects has slowed due to funding constraints from state and local governments.
Financial Institutions
Financial institutions reported that loan demand improved slightly on balance. Increased demand for mortgage and automobile loans drove growth in overall loan demand. However, some contacts recognized softness in business loan demand, due to continuing caution among borrowers. Banking contacts highlighted ample liquidity and generally stiff competition among lenders for well-qualified business borrowers. However, contacts reported that credit availability for small businesses remains limited. Although in past months contacts had pointed to a buildup of privately held technology companies poised for public offerings, the actual pace remains slow for initial public offerings, new venture capital deals, and private equity financing in the District's Internet and digital media subsectors.