September 3, 2014
Economic activity in the Twelfth District continued to improve moderately during the reporting period of early July through mid-August. Overall price inflation remained quite modest, and wage pressures were well contained on net. Contacts indicated that retail sales growth ticked up. Demand for business and consumer services increased moderately. Manufacturing activity was mixed. Agricultural conditions were good in the District overall. Activity in real estate markets advanced, although growth in the residential sector slowed somewhat. Loan demand increased moderately.
Prices and Wages
Price inflation overall remained quite modest. Contacts noted that vigorous competition, including from online vendors, restrained overall retail price increases for nonfood and grocery store food products. Continued minimal price inflation for most food items blunted the effect of larger price increases for meat and dairy items. Some contacts reported that casual dining restaurants passed through the cost increases that resulted from higher minimum wages to their menu prices. In some areas, building supply prices increased. Final sales prices of Internet and digital media services have not changed so far this year and are not expected to change for the rest of the year.
In general, wages continued to increase at a modest pace. However, skilled construction workers experienced more-pronounced wage gains, as did certain technical employees in the computer industry. In addition, some contacts noted upward pressure on salaries for entry-level positions in the financial industry. In most areas, wage changes for lower-skilled workers--beyond the increases that resulted from higher minimum wages--were slight, but some contacts from faster-growing areas reported difficulty filling these positions, resulting in larger wage increases.
Retail Trade and Services
Retail sales growth ticked up since the previous reporting period. Contacts reported that consumers appeared more optimistic about the recovery. Sales of digital games and consumer smart-connected devices and wearables accelerated. Manufacturers have positive expectations for the computing device market, with plans for improvements in hardware and software, as well as new product launches. Auto dealers in Idaho noted that reductions in fuel prices spurred sales of pickups and large sports utility vehicles in recent weeks.
Demand for business and consumer services increased moderately. Businesses continued to invest in cloud services and security. Sales in the quick-service segment of the restaurant industry--coffee and doughnuts--increased relative to earlier in the year. Contacts reported that hotel vacancy rates in southern California declined and room rates rose. Advance bookings for the fall appear somewhat stronger than a year ago. Visitor volume in the first half of 2014 in Las Vegas was up over the same period a year earlier; contacts there cited strength in convention attendance as opposed to in tourism.
Manufacturing
District manufacturing activity was mixed during the reporting period of early July through mid-August. Demand for semiconductors strengthened, partially due to robust orders from other countries. Sales of finished steel products increased over a year earlier. Steel manufacturing capacity utilization during the last three months was at the highest level since 2008, reflecting strengthening demand from West Coast nonresidential builders. However, new orders for commercial aircraft in the first six months of this year were down from the same period in 2013. In addition, demand for finished wood products used in home building was relatively weak during the reporting period, and capacity utilization in this sector was relatively low. Aerospace manufacturing contacts noted that increasing tensions and broadening sanctions against Russia may reduce titanium supplies. Greater demand for composite materials from the aerospace, automotive, marine, and energy sectors as they substitute away from older materials may increase competition for limited supplies of these inputs.
Agriculture and Resource-related Industries
Contacts reported good agricultural conditions in the District overall. Excellent cotton and grain harvests are expected. Produce supplies are somewhat constrained due to the drought in California, and prices of some products, including grapes and nuts, are high. Growers in California were able to tap underground aquifers this year but are concerned about water sources next year should the drought continue. Contacts reported a spike in growers' shipping costs due to the diversion of locomotives to the Midwest to haul oil and gas rail cars to refineries in Texas. Construction activity in China and Japan sustained demand for timber as housing activity in the United States slowed.
Real Estate and Construction
Real estate activity advanced, but growth in the residential sector has slowed since the start of the year in many areas. Sales trends were mixed. Some contacts reported a slower overall pace of transactions, while others reported a pickup, especially for mid-priced homes. Prices increased in most areas, but generally at a slower pace than earlier in the year. Inventories of homes for sale were normal to somewhat elevated in selected areas. Contacts in Hawaii and Oregon reported rising rents and cited high home prices as a spur to demand for apartments. Residential construction activity for multifamily projects picked up. New and expanding medical practices boosted absorption rates for office space. In contrast, retail vacancy rates increased in some areas.
Financial Institutions
Contacts reported that credit availability was good, and overall loan demand increased moderately since the previous reporting period. Demand for consumer loans, including auto loans, unsecured credit, and home equity loans, improved slightly. Contacts expect demand to pick up further as consumer debt levels decline and owners regain equity in their homes. Demand for commercial real estate loans increased moderately. Some contacts reported strong demand for construction loans. Contacts reported that continued uncertainty on the part of small businesses regarding health-care costs is tempering their loan demand. Competition among lenders for customers with high-quality credit is intense. Credit quality improved since the previous reporting period, and loan delinquencies were low. Private equity financing in the Internet and digital media sector in June was at its highest level since the beginning of the recession.