December 3, 2014
Economic activity in the Twelfth District continued to improve moderately during the reporting period of early October through mid-November. Overall price and wage inflation remained modest. Retail sales and demand for business and consumer services increased moderately. Overall manufacturing activity picked up, while agricultural conditions were mixed. Real estate activity advanced, but growth in the residential sector varied across the District. Loan demand increased moderately.
Prices and Wages
Overall price inflation remained modest during the reporting period. Historically low iron ore prices and strong competition from China contributed to declines in finished steel prices. Grain prices remained very low. Natural gas prices declined during the reporting period. Health-care sector contacts reported that medical insurance premium increases for individual coverage for 2015 were very low by historical standards. Prices remained stable in the Internet and digital media sector. However, a maker of paper card games announced the first price increases in eight years. Prices of wallboard, wood, cement, and insulation increased or held at relatively high levels during the reporting period. Average daily hotel room rates in southern California increased to pre-recession levels.
In general, wages continued to increase at a modest pace during the reporting period. Several contacts reported that wages were flat or had increased at about the rate of price inflation in their area. Some employers are implementing wage increases in excess of price inflation for high-value, long-term employees whose wages have been flat in nominal terms for several years. Shortages of workers in skilled construction trades, computer programming, electronic game design, and bank loan origination boosted wages in those sectors. Some contacts in the hotel sector reported that recent minimum wage increases significantly affected overall compensation costs during the reporting period.
Retail Trade and Services
Overall retail sales grew moderately during the reporting period. Contacts cited lower gasoline prices and continued improvement in employment conditions in many geographic areas as spurs to growth. However, contacts reported that retail spending is soft in areas where the employment situation is still weak. Spending on durable goods and household items in the District grew faster than spending on apparel and groceries. Manufacturer incentives contributed to strong auto sales, especially of new vehicles. Many contacts expect this year's holiday retail sales to surpass last year's by 5 percent to 10 percent.
Demand for business and consumer services grew moderately during the reporting period. Demand for cloud computing services continued to increase. Restaurant sales climbed, especially in the quick-service segment. Consumers shifted away from hamburgers, towards chicken, pizza, and Mexican food. Contacts expect that restaurant sales will increase further if gasoline prices continue to decline. Hotel occupancy rates in southern California have been increasing this fall, and October was a particularly strong month. However, holiday bookings by Western Europeans are down from last year.
Manufacturing
Overall District manufacturing activity picked up during the reporting period. Year-to-date semiconductor revenue increased 8 percent from the same period last year, and contacts expect strong sales to continue into 2015. However, slower growth in Europe and Asia contributed to softer sales of semiconductors used in power devices and equipment. Orders for residential building materials increased modestly during the reporting period. Capacity utilization for plants producing steel products used in nonresidential construction increased to its highest level since 2008. However, the stronger dollar and slower growth in Asia contributed to a modest decline in demand for recycled metals. Biotechnology and pharmaceutical sector revenue increased during the reporting period, but contacts reported that some biotechnology companies have postponed initial public offerings of their stock until the economic outlook for Europe improves. Year-to-date commercial aircraft deliveries and orders increased moderately from the same period last year. Aerospace and defense sector capacity utilization decreased during the reporting period.
Agriculture and Resource-Related Industries
Agricultural conditions in the District were mixed during the reporting period. In general, the continuing drought in California depressed yields for crops such as raisins and almonds. However, tomato production and prices hit record highs. Washington saw very strong apple and pear harvests and an increase in agricultural exports. Idaho farmers reported an excellent potato harvest, but late-season rains damaged wheat and barley crops. Domestic and foreign demand for West Coast timber is healthy, and contacts reported that shortages of skilled loggers and logging trucks and equipment increased somewhat.
Real Estate and Construction
Real estate activity advanced during the reporting period, albeit less consistently across the District for residential properties than for commercial properties. Contacts from some urban areas reported that home prices continued to increase rapidly; in other urban areas, however, prices stalled. In rural areas of the District, home prices generally increased at a moderate pace. Some contacts reported that, despite active construction and ample inventories, new homes have been selling at notably higher prices than comparable existing homes. Commercial real estate construction activity was solid during the reporting period, and vacancy rates decreased in most areas.
Financial Institutions
Overall loan demand increased moderately since the previous reporting period. Contacts cited stronger demand for auto loans, credit card loans, and small business refinance loans. Vigorous competition among lenders engendered very favorable loan terms for the highest-quality borrowers. Net interest margins remained narrow, and shrank further for some banks. Some contacts reported that, in their area as a whole, the profitability of community banks declined during the reporting period. In general, private financing activity and venture capital activity were strong.