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The Tenth District economy expanded moderately in June and early July. Consumer spending increased, labor markets continued to firm, and energy activity rose further. Growth in manufacturing activity also remained solid, although firms expressed less optimism about future activity. Drought conditions eased in the agricultural sector but were still a concern. Commercial real estate conditions were little changed, and residential construction remained sluggish. Wage pressures and wholesale price pressures increased somewhat, while retail price pressures held steady.
Consumer spending expanded moderately in June and early July. Most retail contacts reported that sales were higher than in the prior survey period and above year-ago levels. In addition, a larger share of store managers was satisfied with inventory levels than in the previous survey. Retail contacts generally remain optimistic about sales in the next several months. Auto dealers reported that sales in June and early July increased from the previous survey period, but were below those of a year ago. Sales of fuel efficient cars were said to be strong at some dealerships. Inventory levels were reported to be satisfactory, and contacts generally expect further sales increases in the months ahead. Travel and tourism contacts reported activity improved modestly since the previous survey. Passenger counts at most District airports edged up, and hotel contacts said that occupancy rates were generally at or above year-ago levels. Travel and tourism contacts continue to expect solid activity through the remainder of the summer travel season.
Growth in manufacturing activity in the District remained solid in June and early July, but optimism about future activity declined. Production, shipments and new orders increased. However, plant managers were not as optimistic about future activity, especially new orders, as they were in the prior period. Expectations for future capital spending were also low for the second survey in a row. Several contacts noted difficulty acquiring materials, including petroleum-based chemicals and steel, and these problems are not expected to be resolved quickly.
Real Estate and Construction
Residential construction remained below year-ago levels, while commercial real estate activity was generally unchanged. As in the previous survey, most home builders reported that starts were sluggish, and contacts in most parts of the District do not foresee an increase in home construction in the next several months. In some areas, the slowdown in home building was reported to be causing substantial delays in payments to subcontractors. For the most part, there were no significant problems reported in obtaining construction materials, and none are anticipated to arise heading forward. Residential real estate agents in most areas said that home sales increased slightly since the previous survey but remained below year-ago levels. Inventories of unsold homes continued to rise across the District, in part due to an increase in foreclosures of low-end homes. However, many real estate agents noted that the high-end market was weak, as well. Home price appreciation remained modest in most areas, and contacts expect that both home sales and prices will generally remain flat going forward. Mortgage lenders reported that demand for home purchase loans was up slightly since the previous survey, while demand for refinancings was unchanged and remained below year-ago levels. Lenders generally expect both home purchase loans and refinancings to hold steady in the coming months. Commercial real estate activity was mostly flat in June and early July. Vacancy rates and rents for commercial space were unchanged in most markets and, for the most part, commercial real estate agents do not expect conditions to change much in the months ahead.
Bankers reported that both loans and deposits increased since the last survey, leaving loan-deposit ratios unchanged. Demand rose slightly for commercial and industrial loans, commercial real estate loans, and construction loans, while demand for consumer loans declined somewhat. On the deposit side, demand deposits, MMDAs, and large CDs were all higher than in the prior period. All respondents raised their prime lending rates and consumer lending rates since the last survey, while most of them reported that lending standards were unchanged.
Energy activity continued to expand in the District during June and early July. The count of active oil and gas drilling rigs in the region increased slightly since the prior survey period and remained well above year-ago levels. Many contacts continued to report that shortages of equipment and labor were constraining drilling activity, although there were some reports that rigs had become more readily available in certain areas. Drilling is expected to expand further in the months ahead.
Drought conditions eased in some areas in June and early July, although a lack of moisture remained a problem in much of the District. The District wheat crop was down from last year due to the drought, but in some areas the harvest was not as poor as had been expected. The development of spring crops is slightly ahead of the 5-year pace, with the corn crop generally reported to be in good shape. Some pastures, however, continue to weaken, causing producers to use supplemental feed or trim herds. On the financial side, respondents report recent weakness in loan repayment rates as well as lower-than-expected farm capital expenditures. Farm incomes are expected to fall this year due to higher fuel costs and the effects of the drought.
Labor Markets and Wages
Labor markets continued to firm in June and early July, and wage pressures increased. As in previous surveys, hiring announcements outpaced layoff announcements by a wide margin. Many of the new jobs announced were at manufacturing firms, and several call centers also announced plans to add workers. The percentage of contacts reporting labor shortages was similar to the previous survey, but the fraction of firms reporting above-normal wage increases edged up. Among the workers reported to be in short supply were engineers, auto technicians, oil and gas workers, and skilled manufacturing workers.
Wholesale price pressures edged up slightly in June and early July, while retail price pressures were little changed. The percentage of manufacturers reporting higher prices for raw materials was basically unchanged from the previous survey. However, the share of firms reporting higher finished goods prices increased. Expectations for future increases in raw materials and finished goods prices were both slightly higher than in the previous survey period. Home builders indicated that materials costs edged up slightly from the previous survey, and they expect further increases going forward. Both the share of retailers reporting higher prices than a year ago and the share planning price increases in the next several months held steady.