Summary of Economic Activity
Economic activity in the Twelfth District slowed slightly during the January through mid-February reporting period. Overall employment levels were stable on net, but there were reports of layoffs in the technology sector and attrition without replacement in other sectors. Wages grew at a slight pace, and annual pay increases were generally in line with historical averages. Prices rose moderately, and several contacts reported their input costs rising at a faster pace than their selling prices. Retail sales declined slightly, with consumers reportedly pulling back spending following the holiday shopping season, and contacts continued to describe a bifurcated, or K-shaped, economy. Demand for consumer and business services and residential real estate weakened slightly overall. Conditions in the manufacturing, agriculture, and resource-related sectors were stable on net, while activity in commercial real estate and financial services varied by market segment but were unchanged on balance. Demand for community support services, particularly for housing and food assistance, remained high. The economic outlook improved overall, with a higher share of contacts expecting economic activity this year to be similar to or slightly stronger than last year.
Labor Markets
Overall employment levels were stable on net in recent weeks. There were reports of layoffs, which were largely concentrated in the technology sector, particularly in the Pacific Northwest. Attrition without hiring replacements was reported in agriculture, financial services, and business services, while contacts in other industries generally reported stable head counts, hiring mostly to replace departing workers. Labor availability was strong overall, and those employers looking to hire continued to receive a high number of applications for open positions. One contact in the financial services sector noted that many job applicants were overqualified but looking to find work, and that the firm had recently hired a candidate with decades of experience for an entry-level role. Nonetheless, difficulties persisted in attracting and retaining workers in health care and the skilled trades.
Wages grew at a slight pace in recent weeks, similar to the previous reporting period. Annual pay increases were generally in line with historical averages, and several contacts noted the limited ability for non-union workers to negotiate pay adjustments. Wage pressures remained soft in several sectors, although competition for workers in health care and the skilled trades kept compensation costs high across the District, as it did for wages for construction workers in Southern California. Reports continued to indicate that salaries offered to recent college graduates were lower than in prior years.
Prices
Prices rose moderately in recent weeks. Several contacts reported input costs rising at a faster pace than their selling prices due to some large business clients asking for price concessions or pushing back against proposed price hikes. Facing softer demand, manufacturers of wood products and agriculture producers opted to absorb higher costs and to decrease prices in some cases. Additionally, a few reports indicated that consumer-facing businesses generally lacked the ability to pass on tariff-induced input cost increases to price-sensitive households. Utility costs rose further for businesses and households, and grocery prices were reportedly stable at elevated levels.
Community Conditions
Community support organizations continued to report elevated demand for services and limited funding. Organizations found it more challenging to provide support for housing, food, and health-care needs. Competition among nonprofits for limited private sector philanthropic grants was reportedly higher due to continued declines in federal government funding. Some reports noted that District state and local governments facing budget deficits are opting to reduce community service offerings and funding, particularly for education. Small businesses overall remained challenged by elevated operating costs and limited access to credit.
Retail Trade and Services
Retail sales declined slightly in recent weeks. Reports indicated that consumers pulled back spending following the holiday shopping season, particularly on higher ticket items. Contacts continued to describe a bifurcated, or K-shaped, economy. Discretionary spending by high-income households continued at robust levels, while low- and middle-income households continued to trade down to lower-cost and store-label alternatives. Demand for apparel and footwear products benefited from discount offers on excess inventory, and home center sales were reportedly boosted by lower lumber prices.
Demand for consumer and business services weakened slightly overall. Leisure travel bookings fell across most market segments but remained strong in the high-end markets. Households focusing on value-oriented offerings propped up sales at quick service restaurants. Foot traffic and spending at leisure and hospitality establishments in the Pacific Northwest were reportedly dampened by severe weather conditions and worsening consumer sentiment following the recent layoffs in the technology sector. Out-of-pocket spending for health-care services declined, and demand for janitorial and security services fell further. Demand for laboratory testing was largely unchanged at solid levels.
Manufacturing
Manufacturing activity was steady in recent weeks. Contacts reported some improvements in order pipelines for capital equipment, packaging materials, and commercial furniture. Contacts additionally highlighted challenges managing higher import costs for some materials and limited ability to pass on these cost increases to customers. Several reports mentioned the difficulty of operational planning due to the still-elevated economic uncertainty. Manufacturers reported some renewed interest in robotics automation solutions in response to generally elevated labor costs and higher local minimum wage requirements.
Agriculture and Resource-Related Industries
Conditions in agriculture and resource-related sectors remained stable, albeit at a subdued level. Weak international demand for agricultural products, including soybeans and corn, pushed down the prices received by producers despite a weakening dollar. This resulted in an oversupply that could not be absorbed by domestic markets, which were stable overall. While demand for fresh potatoes remained solid, contacts indicated that this segment faced a global overcapacity for potato processing, a situation which put downward pressure on prices. Demand for poultry and pork was reportedly very strong, and cattle prices remained elevated. In utilities, providers continued to focus on infrastructure investments to increase capacity and meet growing demand.
Real Estate and Construction
Conditions in residential real estate markets softened slightly. Demand for single-family homes remained weak. Reports indicated that for-sale housing units stayed on the market for longer durations and that it was more difficult to qualify for refinancing due to stricter lending standards. Demand for multi-family housing was generally stable but lagged supply in some markets, bringing rents down. Construction activity was restrained by elevated costs.
Activity in commercial real estate was steady overall and varied by market segment. Leasing demand for industrial and warehouse space remained soft, and rental rates continued to decline. Demand for retail leasing space picked up in the Mountain West region and was solid elsewhere in the District. Construction activity remained weak overall but was somewhat propped up by infrastructure and health-care sector projects.
Financial Institutions
Activity in the financial services sector varied across business lines but was largely unchanged on balance. Demand for business loans and lines of credit expanded somewhat, while demand for consumer lending products remained muted. Commercial and residential mortgage lending was restrained by still-elevated interest rates. Lending standards reportedly tightened, which prevented some small businesses from accessing credit. Deposit flows remained stable with little change in competition for them over the reporting period. A few reports highlighted expanded activity in private credit markets.
For more information about District economic conditions visit: Twelfth District Beige Book.
Related:
