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Economic growth in the Tenth District moderated slightly in June and early July. Most retailers reported flat, but weaker than expected sales. Manufacturing activity dipped in the period, but the outlook was relatively positive, given current conditions. The residential real estate sector remained depressed, but seemed to stabilize. Commercial real estate saw some improvement, but the outlook was modest. The energy sector continued to boom and agricultural conditions were generally favorable despite severe storms. Prices for raw materials, including fuel, continued to increase significantly, and some of these costs were beginning to be passed through to finished products.
Consumer Spending
Retail spending was flat from the previous survey period, but virtually all retailers reported that sales were lower than planned. Many, although not all, of the retailers seeing a decline in spending from a year ago were related to the residential construction industry in some way. Some business contacts reported that low consumer confidence and high gasoline prices have softened sales. Most auto dealers reported sales were down for the month and for the year, especially for large trucks and SUVs. Access to credit remained a concern for many auto dealers. The tourism industry was a relative bright spot in the Tenth District, especially in the Rocky Mountains, with visitor counts up for the month and year. Although airlines were cutting routes, passenger traffic remained strong, especially in Denver. Restaurant activity was flat, despite higher menu prices.
Manufacturing
Manufacturing activity declined in June and early July. Production and employment levels fell, and most firms continued to reduce inventories. Expectations for future factory activity were generally positive, however, driven in part by persistently high demand for exports and agricultural and energy equipment. Capital spending plans were mostly unchanged, but some firms planned to reevaluate based on surging fuel prices. More producers than in past surveys were beginning to pass-through cost increases to consumers, which some contacts feared could seriously cut demand.
Real Estate and Construction
The residential real estate market in the District was weak, but has stabilized, while commercial real estate activity improved modestly, but with a weaker outlook. Residential sales remained slow in most areas, with a particularly low demand for higher-priced homes, but most agents expected little change in sales volume in the near-term. Prices were lower than last year, but there was little change in prices since the last survey period. At the same time, home price appreciation slowed in some areas in the District where appreciation had been considerably stronger in the last several months. New residential construction softened, and with rising construction costs, existing homes were expected to be much more attractive than new homes. District commercial real estate contacts reported an uptick in sales and leasing activity from the previous survey period, although activity still remained unexceptional compared with last year. Both commercial vacancy and absorption rates moderated from the previous period. Several contacts reported that new construction has been sluggish due to increasing costs and scarce financing options, and some expect this sluggishness to continue or worsen in the near-term. Developers reported a slight decrease in current prices and rental rates, and most expected this to continue in the near future.
Banking
Bankers reported tighter credit standards and slightly weaker loan demand than in the previous survey. Demand for commercial and industrial, commercial real estate, and consumer installment loans declined moderately, while demand for residential real estate loans and agricultural loans remained essentially unchanged. About half of respondents reported a tightening of credit standards for commercial real estate loans, the same as in the previous survey. A quarter of respondents reported tightened standards for commercial and industrial loans, less than in the previous survey. There also continued to be reports of tightened standards for residential real estate and consumer installment loans. A little less than half of the banks said overall loan quality was down from a year ago, but some banks said loan quality had improved.
Energy
District energy activity continued to be very robust in June and early July. Even though the District count of active drilling rigs was down slightly, contacts reported increased activity since the last survey period. In addition, energy firms planned to expand production over the next three months. Filings for intents to drill were up in Oklahoma, and some Colorado contacts noted that companies were exploring the idea of tapping shale oil deposits in northwestern Colorado. Energy companies continued to report that financing was readily available, but production was constrained by a lack of qualified workers and the availability of equipment.
Agriculture
District agricultural conditions were generally favorable after a series of severe storms in June. Crop prices rose to record highs in June as heavy rains delayed the wheat harvest and the planting of corn and soybeans. After a slow start to harvest, District contacts reported average to above average wheat yields. High feed costs continued to limit livestock profits despite stronger cattle and hog prices. Rising input costs fueled an increase in agricultural loan demand and tempered robust farm income expectations. Farmland price appreciation also slowed from its record pace.
Wages and Prices
Price pressures continued to build since the last survey period, but wages remained steady with little upward pressure. Rents were up generally for hotels and resorts, and many restaurants and retailers also reported higher prices since the last survey period and for the year. District manufacturers reported much higher input prices, especially for steel, and for steel plate in particular. Much higher prices for other raw materials and fuel also were reported. A large number of manufacturers were being squeezed by energy prices. Increasingly these higher input prices were being passed on, causing increases in finished goods prices, or alternatively, razor-thin profit margins. Builders also reported higher costs, including for lumber, for which prices recently have been flat. District labor shortages persisted, most notably for retail and tourism jobs and in the energy sector, and hiring announcements continued to outpace layoffs. However, wage pressures remained muted, and while some firms worried about future wage pressure, most firms had no plans to raise wages.
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Minneapolis