January 18, 2017
Summary of Economic Activity
Economic activity in the Twelfth District continued to expand at a moderate pace during the reporting period of mid-December through early January. Overall price inflation increased modestly, while upward wage pressures strengthened. Sales of retail goods picked up, and growth in the consumer and business services sectors remained strong. Manufacturing activity changed little on balance, and conditions in the agriculture sector were largely stable. Contacts reported continued strong activity in residential real estate markets, while conditions in the commercial sector strengthened. Lending activity grew at a moderate pace.
Employment and Wages
On balance, wage pressures strengthened. Labor shortages in the technology, health-care, and financial industries boosted wages for skilled workers. Minimum wage legislation increased compensation for unskilled workers across the District. One contact in the media and entertainment industry reported that some companies were postponing filling vacant positions in order to offset rising costs from minimum wage increases. Wage growth for skilled and unskilled labor in the construction industry picked up further, and contacts reported substantial labor shortages among contractors in metropolitan areas.
Prices
Overall, price inflation increased modestly over the reporting period. Contacts in the hospitality and restaurant industries reported increasing the price of goods and services to offset rising labor costs. Price increases for branded drugs and some generic drugs moderated somewhat from a strong pace. In general, prices for commodities and agricultural goods increased minimally and remained relatively low. However, one contact reported that steel prices strengthened from a low level after a modest pick-up in demand.
Retail Trade and Services
On balance retail sales picked up over the reporting period, but reports varied somewhat by sector. Holiday sales of beverage products were strong, particularly in the Mountain West, where consumer spending was boosted by a tight labor market and rising wages. Sales at apparel retailers were on par with the prior year's holiday season. Demand for personal computing devices slowed slightly from the same period last year. Strong growth in e-commerce continued to reduce foot traffic at traditional brick-and mortar retailers, with one contact reporting that an apparel retailer planned to close 15 percent of their store locations.
Activity in the consumer and business services sector generally grew at a strong pace. Demand for IT business services remained strong, and expectations of future increases in the demand for cloud computing services boosted infrastructure investment in data centers. Sales of gaming products picked up, particularly for games sold through online channels. Growth in e-commerce sales increased demand for transportation services, with one contact noting that holiday sales had nearly doubled volumes from their typical daily level. Contacts in the tourism industry noted that air travel demand was around the same level as the previous year's holiday season. Hotel bookings grew moderately compared with last year's holiday season, and one contact noted that advance 2017 holiday bookings have already surpassed levels experienced as of this time last year. Contacts observed that demand for restaurant and dining services remained sluggish, in part due to adverse holiday weather in the Pacific Northwest. Uncertainty surrounding fiscal policy and the future of the Affordable Care Act reduced providers' demand for some health-care goods and services.
Manufacturing
Manufacturing activity was mixed across sectors but largely flat on balance over the reporting period. Production of pharmaceuticals continued to grow at a strong pace, and contacts reported robust merger and acquisition activity throughout the industry. Demand for energy generation from manufacturers picked up from a low level. Deliveries and new orders for commercial aircraft declined relative to the same period a year earlier. In the steel manufacturing sector production was suppressed by increased global supply, dollar appreciation, and sluggish demand growth from domestic energy producers.
Agriculture and Resource-Related Industries
Activity in the agriculture sector was mixed over the reporting period. Demand for timber products remained strong. Harvests of cherries and apples grew at a moderate pace. Profit margins in the dairy industry improved somewhat. However, contacts noted that dairy producers' investment in equipment was sluggish and focused on replacing aging machinery. Dollar appreciation slowed beef exports, and profitability remains a concern for many producers. Contacts reported that some farmers in California took land out of production due to drought conditions and labor shortages.
Real Estate and Construction
Real estate market activity continued to grow at a strong pace. On balance, activity in the housing market remained strong, yet the pace of growth in metropolitan centers outpaced that in rural areas. Contacts in the Pacific Northwest and Mountain West reported that, while housing demand remained high, construction activity was constrained by shortages in available land, labor, and materials. Demand for new commercial construction strengthened, and one contact noted that activity in the Sacramento area remained robust. Overall, the pace of price increases in the housing market picked up further, yet a few contacts noted that the pace in their regions had slowed slightly. Prices for commercial real estate increased, and vacancy rates remained at historical low levels.
Financial Institutions
Lending activity grew at a moderate pace over the reporting period. Loan demand expanded, and competition for borrowers remained elevated. On balance, deposits grew at a moderate pace, with one contact in the Mountain West noting that strong economic growth led to a surge in deposits at banks in the region. Credit quality strengthened, and liquidity remains ample. Contacts noted that regulatory costs continued to constrain profitability at community banks in some regions.