April 20, 2022
Summary of Economic Activity
Economic activity in the Twelfth District expanded at a moderate pace during the reporting period of mid-February through March. Employment levels expanded, accompanied by higher wages. Overall labor market conditions remained tight. Price levels significantly increased, driven by growing costs and labor shortages. Retail sales and activity in the consumer and business services sector continued to expand, as local economies lifted COVID-related restrictions. Conditions in the agriculture and resource sectors strengthened a bit, while the manufacturing sector improved somewhat. Activity in the residential real estate market remained strong, while commercial real estate activity improved slightly. Lending activity was little changed over the reporting period.
Labor Markets
Labor markets remained tight over the reporting period. A combination of rising wage demands and reported lack of qualified candidates for both low- and high-skilled positions led to substantial worker shortages. Contacts in Alaska and Hawaii mentioned that migration out of their states further contributed to smaller pools of workers. The sectors reporting extreme difficulties filling positions include food services, hospitality, and health services. A few contacts highlighted the airline industry's staffing struggles, resulting in a notable reduction of flights. Firm contacts across sectors reported higher rates of employee turnover and early retirements and workers asking for higher pay, better benefits, and more work flexibility. Contacts also reported that more employees, particularly in larger companies, sought to unionize. In search for workers, the hospitality industry planned on hiring more foreign exchange students over the summer as well as younger workers.
Wage pressures remained high across all sectors. Contacts reported budgeting wage increases by an average of 5% for the current fiscal year. Contacts in health care and financial services noted even higher wage increases. Nonetheless, one contact in banking mentioned steady wages following adjustments made last year.
Prices
Prices grew notably over the reported period. Widespread price increases for food, housing, and energy were mentioned. Manufacturing costs, notably for raw materials, labor, and shipping, expanded considerably and resulted in higher prices for final goods and services. Additional price pressures were reported in services, including banking, legal services, housekeeping, and repair. Oil and gas prices spiked following the onset of the war in Ukraine, directly impacting the costs of fuel and transportation. Contacts from the airline industry expected higher air transportation prices over the next few years due to continued expected increases in fuel prices. Steel manufacturing saw sharp increases in the prices of raw materials. Agriculture was also impacted by the war due to the sizable increases in fertilizer costs.
Retail Trade and Services
Retail sales remained strong. Consumers continued to purchase goods at a high rate despite inflationary pressures. However, sales growth of durable goods such as electronics and vehicles has slowed as rising food and energy prices have eaten away at household budgets. Understaffing continued to be an issue for hospitality, food, and retail trade.
Spending activity in the consumer and business services sector trended up, as Omicron infections declined, and local economies continued to lift COVID-related restrictions. Contacts from the hospitality industry noted robust demand for leisure travel and dining. Professional events and conventions slowly returned to being held in person but are not yet at pre-pandemic levels of attendance. Demand for air travel recovered further and, in some cases, outpaced pre-pandemic numbers, particularly for flights to Las Vegas and Hawaii. Some new restaurants opened to replace some of those that had closed down during the pandemic, as noted by a contact from the food industry in California. At the same time, many service providers, such as in travel and hospitality, continued to face labor shortages. A contact in legal services noted demand for talent had stabilized.
Manufacturing
Activity in the manufacturing sector improved somewhat, and demand remained strong across the District. Packaging and renewable energy contacts reported notable growth for new orders. Many manufacturers are near capacity, and some reported order backlogs. Production continued to be affected by labor shortages and supply chain disruptions including the impact from the more recent COVID-19 outbreaks in China. Nevertheless, a contact from California mentioned a somewhat better ability to hire workers. Some manufacturers noted adjusting to a new normal by investing in automation to reduce their reliance on labor supply, increasing precautionary stockpiles of parts and supplies, and reshoring more of their production to counteract supply chain disruptions. The recent surge in fuel prices brought new concerns regarding shipping and distribution costs.
Agriculture and Resource-Related Industries
Conditions in the agriculture and resource sectors strengthened a bit. Strong demand for regional agricultural products contributed to elevated food prices that are expected to continue to rise. At the same time, input cost increases also accelerated with one contact projecting most farmers to break even as the best scenario this year. Greater costs were attributed to higher expenses for fertilizer, labor, and fuel. A stronger dollar contributed to a decline in agricultural exports over the first quarter of 2022. Additionally, multiple contacts reported periodic disruptions in agricultural exports due to lack of shipping containers and port congestion. Transportation costs were reported to increase two-fold over the last year. While these disruptions are expected to subside, many believed that prices will remain elevated relative to the pre-pandemic level. A contact from the petroleum industry reported declining production of certain oil derivatives, which could add additional price pressures. The recent surge of oil prices to elevated levels is expected to persist.
Real Estate and Construction
Residential real estate demand remained strong despite historically high prices and rising mortgage rates. Nonetheless, some contacts mentioned that they expect a slowdown in demand due to increasing mortgage rates. Widespread price surges are not limited to house sales, but also include rentals of single- and multi-family houses and apartment Supply chain disruptions caused uncertainty in material costs, forcing contractors in Alaska to limit bids to three days. Contributing to soaring housing prices were higher construction costs, lack of land availability, and low housing inventory. As a result, there is a severe housing shortage especially in California and Alaska. One contact in California even noted that the shortage of affordable housing is at crisis levels.
Commercial real estate activity picked up somewhat over the reported period. Hybrid and remote work slowed down the recovery of office, retail, and hotel sectors. Commercial sales ticked up. Construction of multi-use properties began to rise as noted by a contact in Utah. Another contact from the Pacific Northwest mentioned high crime rates hindering the recovery path for commercial real estate in metropolitan areas.
Financial Institutions
Lending activity remained unchanged on balance. Consumer and commercial loans increased somewhat, while demand for residential mortgages edged down due to higher rates. Additionally, consumer mortgage loan refinancing has started to slow down. The majority of bankers report a very competitive environment that prevents banks from raising rates on most lending products. Some banks have eased credit standards to compete for loan customers. Liquidity remained high, supported by a steady growth in deposits and lending. However, one contact in California noted slowing deposit growth due to waning COVID relief payments.