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Economic growth in the Tenth District remained modest in early April and May. Overall, consumer spending was flat and below expectations. Manufacturing activity improved slightly due to rising exports. Residential real estate activity rose seasonally and commercial real estate activity held steady. High commodity prices fueled robust gains in energy and agricultural sectors. Labor markets expanded slightly with some firms noting labor shortages. Reports of wage pressures moderated, but input and finished goods prices rose further.
Consumer Spending
Consumer spending remained soft in May, despite solid travel and tourism activity. Retail sales were flat compared to the previous survey period and were below expectations. Store managers expected sales to ease in coming months. Mall traffic remained slow, partly attributed to higher gasoline and food prices limiting purchases of non-essential goods. A few retailers noted weak jewelry sales. After a rebound in March, auto sales slumped, especially for trucks and SUVs, and access to credit tightened. Auto dealers anticipated sales to remain sluggish even with aggressive sales incentives and discounts. Non-profit organizations and social service agencies reported more requests for financial assistance from low-income households. Travel and tourism activity strengthened since the last survey, aided by a lengthened ski season at many resorts. Despite route reductions, air travel remained strong, especially in the Denver market. However, one travel agent was pessimistic about future tourism activity as bookings have slowed with higher fuel costs. Hotel occupancy and average room rental prices moved higher, and restaurants reported an uptick in sales despite a slight increase in menu prices.
Manufacturing
Manufacturing activity improved somewhat since March and early April, but remained sluggish compared to year-ago levels. Export orders strengthened with several firms citing high overseas demand and increased domestic investment by foreign firms. Production and employment levels stabilized while the volume of shipments increased, reducing inventories. Expectations for future factory activity were generally positive, partly due to strong export demand. Several firms reported that strong sales growth and high capacity utilization were driving plans to increase capital spending. However, plant managers remained concerned that high input prices and transportation surcharges will continue to strain profit margins.
Real Estate and Construction
Residential real estate activity strengthened seasonally from the last survey and commercial real estate activity held steady in late April and May. Realtors, mortgage lenders, and moving companies reported a seasonal pickup in sales that reduced home inventories. Demand for lower priced homes was stronger than demand for high-end homes requiring jumbo mortgages. Still, one realtor noted the market for first-time home buyers has slowed because higher living expenses constrained buyer efforts to save for a down payment. Residential building permits remained well below year-ago levels although multi-family construction remained solid. While home prices continued to edge down in most major markets, prices in rural and energy-intensive areas remained well above year-ago levels. Apartment vacancy rates were down across the District, prompting further rent increases. Commercial real estate construction remained solid since the last survey though the number of sales declined. Commercial vacancy rates edged up and rents stabilized after steadily increasing over the past year. Developers reported commercial real estate prices may decline in some markets where absorption rates are down.
Banking
Bankers reported tighter credit standards and somewhat stronger loan demand than in the previous survey. Demand for residential real estate loans and consumer installment loans increased moderately, while demand for commercial and industrial, commercial real estate, and agricultural loans remained essentially unchanged. Half of respondents reported a tightening of credit standards for commercial real estate loans, about the same fraction as in the previous survey. Just under half of respondents reported tightened standards for commercial and industrial loans, up slightly from the previous survey. Some respondents reported tighter standards for residential real estate and consumer installment loans. Similar to the previous survey, just over half of the respondents said overall loan quality was down from a year ago. However, respondents were somewhat more pessimistic about future loan quality, citing concerns about consumer and residential real estate loans. Bank deposits were little changed.
Energy
District energy activity continued at a robust pace in April and May. Led by Wyoming, the number of active drilling rigs surged since the last survey period and remained well above year-ago levels. Energy firms planned to expand drilling activity in coming months to meet expected demand. Companies reported that financing and equipment are available, though a shortage of skilled workers, especially geologists and engineers, continued to be a challenge for the industry.
Agriculture
Agricultural conditions strengthened further in late April and May. Recent rainfall across much of the Plains eased drought concerns and improved pasture and growing conditions. Despite weather delays, corn planting was almost complete and soybean planting was in progress. The winter wheat crop was reported in good condition and yields were expected to be higher than last year in Kansas and Oklahoma. Many local grain elevators have suspended
offering forward contracts for wheat due to price volatility and hefty margin calls. Livestock producers continued to lose money due to high feed costs. Farmland values continued to post record annual gains and farm equipment sales remained robust. Rapidly rising input costs were expected to trim farm incomes and limit capital spending.
Wages and Prices
Price pressures continued to build since the last survey period but wage pressures held steady. District manufacturers reported that rising raw materials prices, especially for steel and fuel, were contributing to higher prices for finished goods. Many District contacts reported paying fuel surcharges. Farmers reported that higher input costs, especially for fertilizer, chemicals, seed, and fuel, were trimming profit margins. Restaurants were also paying significantly higher prices for food and passing a portion of the increased cost to diners. Retail contacts reported higher selling prices since the last survey and expected further price increases in the coming months. Builders paid higher prices for some construction materials, such as roofing and metal supplies, though lumber prices were flat. District labor shortages persisted, especially for minimum-wage positions and technically skilled workers, but most firms did not plan to raise wages. District hiring announcements continued to outpace layoff announcements.
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Minneapolis