January 18, 2023
Summary of Economic Activity
Economic activity in the Twelfth District expanded modestly during the mid-November through December reporting period. Labor supply improved somewhat, and employment levels grew at a modest pace. Wages and prices rose at a slower pace relative to the previous reporting period. Demand for retail goods was stable, and activity in the consumer and business services sectors was strong. Demand for manufactured products was mixed, while conditions in the agriculture and resource-related sectors remained weak. Activity in residential real estate markets weakened further, while commercial real estate activity was flat overall. Lending activity rose slightly over the reporting period. Communities across the Twelfth District were challenged by elevated living costs and lack of affordable housing. Contacts expressed concern over a weaker outlook for the economy and increased overall uncertainty.
Labor Markets
Employment levels grew at a modest pace during the reporting period as labor availability improved across the District. Job turnover and voluntary quits reportedly fell in recent weeks, and hiring difficulties eased in consumer services sectors such as retail, food services, and hospitality. Contacts reported strong competition for labor and difficulties attracting experienced talent in health care, legal services, manufacturing, and skilled trades. Several real estate firms and mortgage providers reported reducing the number of open positions in response to moderating demand and noted that recent hiring freezes and layoffs in the technology sector improved the size and quality of the applicant pool. Contacts in Alaska and Hawaii continued to report challenges filling entry-level positions, partly due to elevated shelter costs. Several employers noted that, despite overall economic uncertainty, they plan to maintain current employment levels to avoid the hiring challenges they have experienced throughout the pandemic.
Wages grew further, albeit at a slower pace. Workers continued to ask for higher pay and end-of-year bonuses in response to elevated living costs. Employers continued to use bonuses and comprehensive benefits packages to attract and retain talent and reported more willingness to push back against flexible work arrangement requests.
Prices
Prices rose at a slower pace relative to the previous reporting period, but overall price levels remained very elevated. Contacts cited wage pressures as the primary driver of the price inflation they have experienced in recent weeks. Several contacts, particularly in manufacturing and construction, reported plans to pass through last year's cost increases to their customers when annual contracts are renegotiated. Several sectors reported higher prices, including health care, food services, hospitality, insurance, and air travel. Conversely, gradually improving supply chains and cooling overall demand have resulted in stable or lower prices for many goods, including energy products, medical equipment, electronics, office supplies, and manufacturing inputs such as steel and lumber.
Community Conditions
Communities across the District continued to highlight key issues such as high inflation, lack of affordable housing, and lower enrollment rates at community colleges and higher education institutions. Reports indicated people are working "side hustles" or multiple jobs to afford the elevated living costs, and concerns of evictions have increased of late as rent inflation further strained household budgets. Donation-dependent nonprofit and philanthropic organizations noted that tighter financial markets have resulted in significant drops in fundraising inflows. This reduction was partially offset by government funding in some areas, including parts of California and Nevada. Contacts also highlighted that the recent uptick in respiratory infections, including influenza, intensified worker and volunteer shortages at many community and social support organizations.
Retail Trade and Services
Retail sales were stable over the reporting period. Reports on holiday season sales were mixed, and retailers noted higher prices and healthier inventory levels compared with last year. Contacts also highlighted a continued shift in spending behavior away from in-store shopping to e-commerce. Sales for some consumer durables, such as automobiles, were reportedly up in recent weeks, and demand for wood products strengthened as consumers favored renovation projects over new home purchases. Labor availability eased somewhat but remained tight, and some contacts reported continued adoption of labor-saving technology to address worker shortages.
Activity in the consumer and business services sectors was unchanged but remained strong on balance. Demand for health-care services picked up in recent weeks, in line with seasonal trends. Activity in the leisure and hospitality sector remained robust, although a Southern California contact reported a notable softening in demand for hotel stays. Demand for insurance and legal services was strong. A Southern California contact reported increased demand for marketing products recently as companies aimed to bolster brand recognition and employee engagement. Labor costs remained elevated and increased slightly in some sectors, such as health care and hospitality, but contacts noted that higher wages improved employee retention.
Manufacturing
Activity in the manufacturing sector was mixed over the reporting period. Demand strengthened for capital equipment and manufactured intermediate goods in the packaging, logistics, and aviation industries. Conversely, demand for manufactured metal products, renewable energy equipment, and intermediate construction goods softened, partially due to slower activity in the residential real estate market. Capacity utilization in food manufacturing improved, although labor shortages continued to constrain production. Manufacturers reported that disruptions in labor markets and supply chains had eased but input costs remained elevated. Contacts in Utah highlighted strong overall conditions for local manufacturers, noting increased business migration to the state.
Agriculture and Resource-Related Industries
Conditions in the agriculture and resource-related sectors remained generally weak. Overall domestic agricultural sales were up in terms of dollars but down in volume. Sales abroad varied by export market, with demand from Asian and European markets declining or remaining unchanged, while demand from the Middle East increased significantly. Global economic uncertainty and a generally strong dollar continued to put downward pressure on international demand. Adverse weather conditions negatively impacted agricultural yields across the District, including for cherries, grapes, and nuts. Seafood production was also down, partially due to closures of crab fisheries in Alaska. Contacts noted that supply chain bottlenecks ameliorated further, but transportation and materials costs remained elevated. One producer in the Pacific Northwest noted that demand for timberland remained high, partially due to growing private interest in opportunities for carbon offset investment.
Real Estate and Construction
Residential real estate activity weakened further in recent weeks. Demand for new and existing single-family housing fell modestly across the District, primarily driven by high prices and mortgage costs. Contacts reported that selling prices began to come down and rental rates were stable on balance. Construction of single-family housing dropped moderately as existing projects reached completion and starts fell modestly. Construction activity for multifamily housing varied across the District as activity was solid in Northern California and Washington but down in Oregon. Contacts noted some construction materials prices, such as wallboard, fell substantially, while other materials prices remained stable but high.
Conditions in the commercial real estate market were stable on net. Office leasing activity was weak, and vacancies remained elevated. Demand for industrial, medical, and retail space was generally strong, particularly in Nevada. Several contacts in the Pacific Northwest and California noted that overall commercial real estate activity softened in recent weeks due to higher interest rates. Construction of new commercial space remained strong in segments other than office space, although contacts commented that the shortage of construction workers continued to constrain new development.
Financial Institutions
Lending activity rose slightly across the District. Many contacts noted that demand for consumer loans, including for credit cards, home equity, and vehicles, has picked up in recent weeks. Conversely, residential and business lending activity slowed further, reflecting high interest rates and rising economic uncertainty. Competition for deposits tightened as deposit growth slowed, with one credit union financier mentioning the need to borrow funds to match loan demand. Credit quality remained strong, but bankers observed some general deterioration of late. Some business contacts reported pausing large borrowing and investment plans given the current economic uncertainty.