June 1, 2016
Economic activity in the District grew at a moderate pace during the reporting period of early April through mid-May. Overall price inflation was modest, while wage pressures picked up. Sales of retail goods grew slightly, while activity in the consumer and business services sector expanded at a moderate pace. Demand for manufacturing products was largely flat. Activity in the agriculture sector expanded somewhat. Residential and commercial real estate market activity continued to expand at a robust pace. Lending activity grew moderately.
Prices and Wages
Overall price inflation was modest over the reporting period. Strong demand for building materials pushed up their prices and hence overall construction costs, particularly in large cities. Global supply shortages pushed up steel prices somewhat. Price changes varied for pharmaceutical products, with contacts reporting continued growth in the price of branded products and price declines for many generic drugs. Prices for electronic components were flat. In the retail grocery sector, growing competition due to expansion by online retailers held down price growth for most products. Contacts in the apparel industry reported significant price discounting.
Wage inflation picked up somewhat across the District. Contacts reported that minimum wage increases pushed up wages for low-skilled workers in various service sectors, with diminishing ripple effects up the pay scale. Firms in some states with typically lower labor costs reported that a recent influx of business investment has increased the demand for labor and pushed up wages in general. Rising demand for skilled labor boosted total compensation packages in the aerospace and defense sector. By contrast, wage increases in the semiconductor industry have remained modest. On balance, labor shortages in the construction sector increased wage pressures for skilled workers. One contact in the real estate development industry noted that upward wage pressures had moderated in the San Francisco Bay Area relative to earlier this year.
Retail Trade and Services
On balance, retail sales grew slightly over the reporting period. Food and beverage producers reported a slight uptick in sales, and wholesale grocers noted that consumer demand for higher-priced premium products remained subdued. Sales of motor vehicles varied across the District: Contacts in major metropolitan areas reported continued moderate growth, while rural region sales slowed, in part due to insufficient inventories of light trucks. Demand for apparel products remained somewhat weak and inventories increased, causing concern that oversupply would hold down profitability in the coming months. Contacts reported that sales of gaming products strengthened despite slowdowns in a few foreign emerging markets.
Activity in the consumer and business services sector expanded at a moderate pace. Contacts reported that activity in the tourism industry strengthened as unusually ample late-season snowfalls boosted visits at ski resorts in parts of the District. Activity in the transportation sector picked up as next-day deliveries were propelled by strong e-commerce sales. Sales of cybersecurity and cloud computing services picked up further. Sales at restaurants slowed, driven in large part by a slowdown in same-store sales at quick service restaurants.
Manufacturing
Manufacturing activity was largely flat over the reporting period. Makers of pharmaceuticals reported tightening financial conditions and setbacks in the production of pipeline products, somewhat slowing activity in the sector. Orders of electronic components and computers were flat, keeping factory utilization rates below historical norms. Steel producers benefited from reduced overseas competition. More generally, however, contacts reported somewhat weak demand for other manufactured metals, as the favorable effects of lower input prices on production and profits only partially offset a lack of global competitiveness stemming from an elevated dollar. Manufacturers in the aerospace and defense industry reported that federal sequestration continued to constrain demand and production activity somewhat, although overall domestic and foreign demand for fighter jets remained strong. Contacts in the electric utility sector reported that demand from the manufacturing sector remained soft, but they expect some strengthening in the future as higher oil prices lead to increases in extraction and refining activity.
Agriculture and Resource-Related Industries
Activity in the agriculture sector expanded somewhat over the reporting period. Domestic demand and sales continued to grow for a wide variety of crops. Contacts reported that an oversupply of potatoes from the 2015 harvest has created excess inventories and led some growers to switch acreage to wheat production. The strong dollar continued to hold down agricultural exports in general, although overseas sales of pork products registered further strong growth. Demand for poultry exports was robust as pent-up demand from last year's avian flu outbreak persisted and lower input prices helped exporters remain competitive globally. By contrast, activity in the cattle industry declined further, and feedlots faced challenges to remain profitable.
Real Estate and Construction
Real estate market activity grew at a robust pace across most of the District. Demand for residential real estate remained strong for both multifamily and single-family units. Growth in the construction of multifamily units continued to outpace that for single-family units. Contacts reported construction lead times of up to six months for multifamily projects in some urban areas constrained by shortages of skilled labor and building materials. Building permits for all types of residential construction picked up in most parts of the District. Demand for commercial real estate expanded further, most notably in urban areas with robust technology and health-care services industries. Contacts in states that have legalized sales of cannabis products noted a pickup in demand for retail storefront property.
Financial Institutions
Lending activity grew moderately over the reporting period. Demand for business loans increased in most areas, although small business lending remained weak in Southern California. Mortgage originations picked up, although one contact noted that institutional investors remained wary of securitized mortgages not backed by government guarantee. Deposit growth at banks was strong and most contacts reported ample liquidity. Credit quality improved across most asset classes, but a few contacts mentioned a tightening of underwriting standards, particularly for mortgages. Contacts reported that costs associated with increased regulation remained a barrier to profitability at smaller banks. Still, net margins improved across the industry, after having been low for some time.