Summary of Economic Activity
Economic activity in the Twelfth District edged down slightly during the mid-August to September reporting period. Employment levels were little changed on net as most employers held head counts steady. Wages grew slightly, and prices rose modestly. Activity in retail trade and residential real estate decreased somewhat while commercial real estate activity was unchanged on balance. Manufacturing and lending activity remained largely stable. Conditions in agriculture and resource-related sectors weakened slightly. Conditions in the consumer and business services sector were mixed. Conditions in community support organizations and small businesses weakened modestly. Contacts’ economic outlook weakened somewhat relative to the prior reporting period.
Labor Markets
Employment levels were little changed on net over the reporting period. Most employers hired only to replace workers, holding head counts steady. Several contacts in manufacturing and health care noted reductions in staff levels through attrition, layoffs, and early retirements. In some cases, employment reductions were coupled with investment in artificial intelligence (AI), particularly for positions and tasks usually reserved for less experienced employees. In contrast, employers in financial services and insurance continued to hire. The number of applicants for each open position increased, and employers generally found it easier to hire. However, a few contacts in construction and manufacturing noted more difficulty finding workers for their entry-level positions, and they attributed that to reduced immigration. Turnover continued to slow across industries, and some contacts highlighted efforts to prioritize the retention of experienced employees.
Wages grew slightly in recent weeks, similar to the previous reporting period and in line with reported past growth rates. Wage pressures softened across many sectors, including banking, business consulting, and retail. Nonetheless, wage pressures persisted for highly specialized positions, such as in AI technology, and for some lower wage jobs in construction and manufacturing. One contact reported that wages rose in health care as a result of recent labor union contract negotiations.
Prices
Prices rose modestly as in the prior reporting period. Higher import duties led to a widespread cost increase for imported supplies, including raw materials, electrical and electronic components, and food. Many suppliers absorbed some of the price increases. However, retailers reported passing a sizable portion onto consumers, mostly in the mid to high-end markets. Several restauranteurs facing high ingredient costs observed a simultaneous drop in customer traffic and a strong resistance to higher menu prices. This led some restaurants to reduce portion sizes or change recipes. Contacts in the insurance industry also highlighted pushback on price increases with customers bundling insurance benefits to reduce the overall cost.
Community Conditions
Conditions in community support organizations and small businesses weakened moderately. Demand for assistance rose, particularly for food, other basic household necessities, and health care. At the same time, funding and grant cuts limited their ability to provide assistance. Small business owners reported lower demand and strained finances, as they drew down savings and reduced investment. Contacts attributed some of the decline in demand to changes in customers’ behavior in response to immigration policy. Reports indicated more business closures and cuts to operating hours as well as some increases in loan delinquencies.
Retail Trade and Services
Activity in retail trade decreased slightly on net over the reporting period. Retailers generally attributed lower demand to higher tariff-induced prices and seasonal factors. Demand for many consumer goods reportedly softened, including for food products, beverages, clothing, and pet supplies. Contacts in tourist destination areas mentioned that travel-related retail spending was lower because of slower foot traffic. Reports highlighted that retail sales of luxury goods and athletic footwear continued to perform well, while the demand for more affordable goods declined further. One contact in Utah reported increased shopping center sales as new stores were opened.
Conditions in the consumer and business services sector were mixed. On the one hand, consumer demand at entertainment venues and some quick service restaurants continued to grow, partially due to successful marketing campaigns and diversified offerings. Additionally, demand for business technology and health-related food services grew more noticeably. On the other hand, demand for elective health procedures, hospitality, and travel services declined further. Lower sales at full-service restaurants resulted in some businesses closing in the Pacific Northwest. A transportation services contact in Alaska highlighted lower freight volumes throughout the state.
Manufacturing
Manufacturing activity remained largely stable in recent weeks. While demand for automated equipment continued to grow, demand for some manufactured furniture weakened further. Some manufacturers noted increased levels of excess capacity. Most reports highlighted adequate materials availability but at higher costs, including for utilities and imported semiconductor chips. One manufacturer based in Hawaii reported higher sale prices, reduced payroll, and lower production volumes. A contact in the automotive sector noted that higher tariff costs resulted in stricter criteria for moving ahead with investment opportunities.
Agriculture and Resource-Related Industries
Conditions in agriculture and resource-related sectors weakened slightly, as in the prior reporting period. Demand from abroad, particularly from China, reportedly continued to fall because of trade policy adjustments and negotiations. Favorable weather kept yields stable, but a recent heat wave and smoke from fires in the Pacific Northwest lowered fruit quality. Costs for packaging materials rose, and financing costs remained high. Higher costs combined with low prices for agricultural commodities continued to put financial strain on producers. Several contacts reported difficulties finding enough labor due to changes in immigration policy and resulting labor shortfalls reduced harvests. One contact emphasized that anticipated declines in sales volume would limit investment for the following season.
Real Estate and Construction
Residential real estate activity decreased somewhat over the reporting period. Demand for new and existing single-family homes fell. Properties stayed on the market longer, inventories rose, and developers continued to offer incentives to buyers. Several Northern California contacts observed that prices eased as a result. New residential construction remained limited with contacts citing lower demand from potential home buyers. Contractor project backlogs shortened, increasing the competition for work. Slowing construction activity created scope for builders to negotiate lower prices for domestic lumber. Construction materials were largely available.
Commercial real estate activity was unchanged on balance. New commercial construction remained subdued overall but was buoyed by public and private infrastructure projects, such as roads and data centers, as well as construction of health facilities. One contact reported a small increase in leasing demand from sectors such as manufacturing and logistics as more businesses opted not to further postpone decisions about space needs. Changes in rents were mixed. A Southern California contact reported that elevated vacancies pushed rents down across commercial sectors, while a contact in Utah observed that rents rose for retail space but changed little for industrial and office space.
Financial Institutions
Lending activity was largely steady over the reporting period. Recent reductions in interest rates started to spur additional demand for loans, but borrowers remained cautious in light of high uncertainty. Demand for commercial loans continued to be muted in general but strengthened in areas of Arizona due to large semiconductor manufacturing projects. Deposit rates were little changed, but some contacts expected reductions ahead. Credit and asset quality remained generally stable at high levels, although one contact in Utah noted an increase in losses related to fraud.
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