Summary of Economic Activity
Economic activity in the Twelfth District expanded modestly during the mid-November through December reporting period. Employment levels were largely stable, although some contacts reported recent and planned layoffs. Wages grew somewhat, and the rate of price increases intensified in recent weeks from a modest to a moderate pace. Retail sales grew modestly overall, with muted holiday shopping in November giving way to stronger-than-expected spending in December, stemming mainly from high-income consumers. Conditions in the services, real estate, agriculture, and resource-related sectors were stable on net, while manufacturing activity softened somewhat. Lending activity increased slightly, as borrowing rates fell. Demand for community services, particularly for food assistance and childcare, remained high. Contacts’ economic outlook improved slightly since the previous report.
Labor Markets
Employment levels were stable on net. Contacts across sectors and geographies continued to report no major changes to their head counts, and they remained focused on improving efficiencies and enhancing worker productivity. There were more reports of recent and planned layoffs relative to previous reporting periods, but most employers looking to trim head count still favored reductions through normal attrition. Reports indicated that seasonal hiring in the retail and consumer services sectors was somewhat weaker than in prior years due to expectations of softer demand. Employers looking to hire received more applications for open positions. Nonetheless, difficulties persisted in attracting and retaining workers in engineering fields, mid-level management, health care, and the skilled trades.
Wages grew only slightly in recent weeks, similar to the previous reporting period. Employers reported year-end pay increases in line with historical averages, but annual bonuses were below levels observed in recent years. Wage pressures remained generally soft across several sectors, although they persisted in health care and areas affected by higher local minimum wage requirements. Reports indicated that salaries offered to recent college graduates were lower than in prior years.
Prices
Prices rose moderately in recent weeks, at a somewhat faster pace than during the prior reporting period. Several contacts in retail, consumer and business services, construction, transportation, and manufacturing reported implementing price hikes to offset higher tariffs and rising costs of utilities, insurance, and some raw materials. Reports indicated that prices of groceries increased on net across geographies and were particularly elevated for beef and other meat products. Some firms facing soft demand, such as manufacturers of wood products and leisure and hospitality providers, opted to absorb higher costs and decrease prices in some cases. Agriculture input costs, including those for phosphates and other fertilizers, rose notably in recent weeks, pushing unit costs above the selling price for some products.
Community Conditions
Conditions for community support organizations weakened further in recent weeks. Demand for community services, particularly food assistance and childcare, remained high. Meanwhile, the ability of nonprofit organizations to provide services continued to be limited by unstable funding, rising costs, and increased administrative compliance requirements. Flooding in the Pacific Northwest additionally spurred demand for assistance services in the region. A few nonprofit contacts reported a seasonal increase in financial donations near year-end, which helped partially offset earlier cuts in federal funding. Organizations continued to report operating at or near capacity with limited budgetary and staffing flexibility. Small businesses reported increased costs and ongoing difficulties in accessing credit, partially due to regulations around community development financial institutions.
Retail Trade and Services
Retail sales grew modestly in recent weeks, primarily driven by robust spending from high-income households. Reports indicated that this holiday shopping season began with subdued activity on Black Friday before holiday spending picked up notably and exceeded sales from prior years. Nevertheless, several contacts described a bifurcated, or K-shaped, economy this holiday season. Specifically, discretionary spending by high-income households continued at robust levels, with brisk demand for luxury products, while low- and middle-income households continued to trim budgets and trade down to lower-cost and store-label alternatives.
Conditions in the consumer and business services sector were stable. Severe weather conditions in the Pacific Northwest dampened spending at restaurants and leisure and hospitality establishments, while heavy snowfall in the Mountain West region in late December boosted demand for ski resorts and winter sports. Demand at quick service restaurants remained solid overall, although some contacts observed a shift by low-income households toward eating at home and purchasing fewer protein options in the face of tight budgets and elevated costs. Demand for laboratory testing and health-care services was largely unchanged, remaining at solid levels, while demand for janitorial and security services fell slightly.
Manufacturing
Manufacturing activity softened somewhat in recent weeks. Demand for large capital equipment slowed overall, partly due to the impact of higher freight and raw materials costs. In contrast, demand for packaging machinery remained strong. Several sawmills across the District curtailed operations reportedly in response to weakening demand for manufactured wood products and falling lumber and plywood prices. Sales of packaged food products were generally stable in domestic markets but soft in export markets.
Agriculture and Resource-Related Industries
Conditions in agriculture and resource-related sectors were generally subdued in recent weeks and little changed relative to the prior reporting period. Domestic demand for crops was largely stable, crop yields were robust, and materials were sufficiently available. Contacts reported an oversupply of some agricultural products, which pushed down the prices received by affected producers. International demand for agricultural products, including soybeans, continued to be dampened by uncertainty and tariffs. Ranchers observed increasing demand for poultry and pork, while they expected elevated cattle prices to remain despite some recent moderation from the previous quarter’s record highs. Demand for logs and grapes fell further. In Hawaii, labor shortages impacted the harvest for macadamia nuts and coffee. One contact in the Pacific Northwest noted that lending to producers has tightened and that some growers may be facing foreclosure or bankruptcy. In utilities, providers focused on infrastructure investment to increase capacity and meet growing demand.
Real Estate and Construction
Conditions in residential real estate were generally stable. Demand for single-family homes and multifamily units remained subdued but steady. Some contacts reported signs of slightly improved demand following decreases in mortgage interest rates. Construction activity, including programs for affordable housing, was restrained but stable overall. Availability of construction materials and labor was reportedly adequate, albeit at higher costs. In Southern California, one contact noted continued high housing demand and low inventories.
Activity in commercial real estate was steady overall. Leasing demand for industrial space was in line with the previous reporting period. Contacts reported increased times to execute leasing decisions due to uncertainty. Market rents declined further but at a slower pace. New commercial construction remained flat in most sectors but was somewhat bolstered by projects for health care, education, infrastructure, and data centers. Contacts in California and Utah reported increased bidding and heightened competition for new construction projects.
Financial Institutions
Activity in the financial sector increased slightly over the reporting period as short-term interest rates decreased further. Consumer demand for auto loans, home equity loans, and mortgages rose slightly in many regions, while credit card utilization fell marginally. Commercial loan demand expanded somewhat, as some investors reportedly moved forward with capital investment decisions. However, commercial loan demand from small businesses remained subdued. Deposit flows varied by region, and deposit rates were little changed. Asset quality and allowances for loan losses remained stable. A few contacts in California reported increased merger and acquisition activity near year-end.
For more information about District economic conditions visit Twelfth District Beige Book.
Visit the Federal Reserve Board of Governors’ Beige Book page for the national summary, reports from all 12 Districts, and archives dating back to 1996.
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