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Growth in the Tenth District economy slowed to a very modest pace in late January and February. Consumer spending was flat, and manufacturing activity was sluggish. Residential real estate activity remained weak but stable, while commercial real estate activity eased somewhat. The energy sector continued to post solid gains, however, and agricultural investment continued to rise. Labor markets also expanded modestly. Most firms indicated few wage pressures, but overall price pressures increased, driven by rising commodity input costs.
Consumer Spending
Consumer spending was largely unchanged from the previous survey period. Non-auto retail sales were flat overall, with most contacts reporting slower activity than expected. Some of the softness was attributed to colder-than-normal weather, but many retailers blamed less foot traffic on negative media reports about the economy. Sales of housing-related items remained especially weak, while restaurant sales and sales of cold weather items were solid. Managers generally expected continued sluggish retail sales in the months ahead, and many stores were being cautious with inventories due to slower sales and less cash flow. Auto dealers reported reduced sales and an uptick in inventories, which many attributed to fewer potential buyers being able to qualify for credit due to tightened lending standards. Sales of trucks and SUVs remained weak, and dealers reported a shift from new, more expensive cars to pre-owned, lower-priced vehicles. Travel and tourism activity was generally positive, with solid business travel offsetting some softness in leisure travel. Most contacts continued to expect strong travel and tourism activity in coming months, driven in part by expected increases in international travel to the Rocky Mountains.
Manufacturing
Manufacturing activity was sluggish in late January and February, but expectations for future factory activity remained solid. Plant managers reported some weakness in production and shipments, particularly among producers of food and chemicals. Still, new orders continued to increase moderately, driven in part by export orders, and capital spending plans remained solid. The majority of producers also indicated steady hiring plans for 2008 as a whole. However, some contacts put near-term hiring and capital spending plans on hold, given economic uncertainty.
Real Estate and Construction
Residential real estate activity remained weak, while commercial real estate activity slowed somewhat. Home sales were slow but stable, with sales of lower-priced homes greatly outpacing sales of higher-priced homes. Several real estate agents reported a decline in the number of qualified buyers due to tightened credit conditions. Still, agents were generally optimistic about sales in the months ahead. Builders reported that speculative construction remained at very low levels, helping to keep unsold home inventories from rising further. However, most housing contacts did not expect home inventories to decline to normal levels until 2009. Home prices continued to edge down in many areas, but some stabilization was expected in the near-term and several energy and agriculture-dependent areas continued to see home price increases. Commercial real estate activity edged down from the previous survey period, as construction and absorption slowed from solid levels. However, vacancy rates remained relatively stable and prices and rents were largely unchanged. Several developers reported hesitancy in beginning new projects, and many noted stricter underwriting standards for investment loans.
Banking
Bankers reported weaker loan demand, tighter credit standards, and a worsened outlook for loan quality since the last survey. Demand fell for all major categories of loans, but especially commercial real estate and commercial and industrial loans. About half of the respondents reported a tightening of credit standards for commercial real estate loans, a higher proportion than in the previous survey. There were also some reports of tightened standards for commercial and industrial loans, consumer installment loans, agricultural loans, and residential real estate loans. Most respondents who tightened credit standards attributed the change to a weakening in the economic outlook. A substantial number of banks reported that overall loan quality was down from a year ago, and loan quality was expected to decline somewhat further. Bank deposits fell moderately, led by declines in demand deposit accounts.
Energy
Energy activity continued to expand at a solid pace in late January and February. Most contacts reported steady or increased drilling activity, and producers' expectations for future exploration rose from the last survey period. Several firms reported that shortages of labor continued to constrain drilling activity, but other companies said investments in newer drilling technologies has made recruiting and retaining workers less of an issue. Capital spending plans continued to be strong, and credit conditions were still reported as positive in the industry, with most contacts citing strong cash flows and ample financing opportunities.
Agriculture
Agricultural conditions remained favorable in late January and February. The winter wheat crop was in good condition, with abundant snow cover and heavy mountain snowfall improving prospects for spring stream flows. Record high crop prices quickly translated into robust farm capital spending and record farmland value gains. However, production costs for both livestock and crop producers rose further. Rising margin calls on commodities futures contracts and large inventories of crop inputs also strained cash reserves at grain elevators.
Wages and Prices
Price pressures increased overall, although soft labor market growth limited wage pressures. Manufacturing and construction contacts reported an upsurge in raw materials prices, especially for steel, copper, and any materials with high transportation costs. Factory finished goods prices also escalated from the previous survey and were expected to rise further. Restaurants reported a substantial rise in food prices, particularly for wheat flour-based products, and several planned to raise menu prices in the near future. However, overall retail selling prices were largely unchanged and expected to remain stable. District hiring announcements continued to outpace layoff announcements but by a smaller margin than in recent surveys. Several sizable additions to employment were reported in the energy and engineering industries, while some layoffs were announced in the financial and food manufacturing sectors. A number of firms continued to report difficulties hiring skilled workers, such as maintenance technicians, as well as some entry-level workers, particularly housekeepers and sales positions. But wage pressures remained largely contained.
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Minneapolis