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The Tenth District economy weakened in October and November. Consumer spending and manufacturing activity declined, and the slowdown in commercial real estate intensified. Residential real estate activity continued on a downward trend and the energy sector slowed moderately, while agricultural conditions were largely unchanged. Bankers reported tighter credit standards, lower loan demand, and weaker loan quality. Most business contacts expressed little optimism about economic activity going forward. Price pressures eased further with falling energy prices, and wage pressures diminished due to weakness in the labor market.
Consumer Spending
Consumer spending slowed sharply in October and November, and expectations for future activity also diminished. Retail sales fell from the last survey period, and most retailers expected a continued downward trend going forward. Store managers reported a slowdown across nearly all spending categories, with luxury items especially weak. Store inventories remained fairly flat, however, as the recent weak sales were largely expected. Auto sales also dropped from the previous period, with continued weakness expected in the months ahead. Several auto dealers noted strong demand in the used car market, but many contacts cited increased difficulties in obtaining financing for used cars. Travel and tourism activity remained sluggish, with several hotel contacts reporting less business travel. Virtually all tourism contacts expected travel activity to weaken further in coming months. Restaurant traffic was down sharply from the previous survey. Several restaurant contacts noted a particular decline in senior citizen traffic, which they attributed to recent losses in retirement income.
Manufacturing
Manufacturing activity declined sharply after slowing in the late summer months. Overall production was weak at both durable and non-durable-goods producing plants. Most plant managers reported sizable decreases in shipments, new orders, and order backlogs, and several firms reported recent layoffs or temporary plant shutdowns due to falling demand. Expectations for future factory activity also dropped considerably, and many firms anticipated declines in revenues for 2009. Some contacts noted that tight credit markets had prevented customers from moving forward on planned projects. Export orders continued to fall from high levels posted in the first half of the year, but some contacts expected a slight rebound in exports heading forward.
Real Estate and Construction
Residential real estate activity weakened further in October and November, while the slowdown in commercial real estate activity intensified. Home sales decreased from the previous survey, and expectations for future sales were also sluggish. Real estate agents reported higher demand for lower-priced homes than for homes in the mid to upper-level price range. Home inventories stabilized somewhat, but still remained at very high levels. Residential construction activity slowed, with several contacts reporting an increase in builder bankruptcy filings. Mortgage origination loans declined further, and contacts reported a considerable drop in home refinancing. Commercial real estate activity fell across the District, and future expectations remained weak. Contacts cited much tougher lending restrictions and reduced investment activity. Vacancy rates increased substantially from the prior period, and absorption declined further. Rental rates also fell considerably, with levels well below a year ago. Most real estate contacts expected a decrease in revenue growth for 2009 due to slower sales and reduced credit access.
Banking
Bankers reported lower loan demand, tighter credit standards, and weaker loan quality since the last survey. The net fraction of banks reporting a decline in overall loan demand was substantially greater than in the previous survey, and demand was reported to be down for all major loan categories except agricultural loans. Most community banks reported no signs of customers drawing down lines of credit, but some large companies reported using credit lines with large banks due to strains in commercial paper and bond markets. About the same fraction of banks as in the last survey said they had tightened credit standards, and such tightening remained especially high for commercial real estate loans. Assessments of current loan quality were similar to the last survey, but expectations for future loan quality declined. Just under half of respondents reported increases in deposits, and most attributed the increases to a flight to quality. One bank noted that availability of deposits had become a much bigger constraint on its lending than capital, due to aggressive competition for funds from large institutions.
Energy
Energy activity moderated somewhat, as oil and natural gas prices fell further. Most contacts reported a decrease in drilling activity, though generally from very high levels. Producers' expectations for future drilling also dropped markedly, with several contacts expecting the national rig count to fall by approximately 25 percent over the next year. Natural gas wellhead prices were especially low in some areas of the District, due to full pipelines. While most contacts expected a modest rise in oil and natural gas prices in coming months, several noted risks to a rebound in regional drilling in 2009. These included increased productivity of recently deployed rigs, the return of previously shut down Gulf Coast production, and the potential for weaker than expected demand.
Agriculture
Agricultural conditions held steady in October and November. The fall harvest was almost complete and winter wheat emergence progressed normally. Above-average corn and soybean yields, especially in Nebraska and Kansas, helped support farm incomes. A drop in cattle and hog prices due to slower domestic and export meat demand squeezed profit margins for livestock operators. Farm loan demand strengthened with rising input costs, and the availability of funds for operating loans fell modestly. District contacts reported increased collateral requirements for farm loans and expected further tightening in credit conditions in coming months. After a seasonal summer pause, farmland values moved higher this fall.
Wages and Prices
Price pressures eased further in October and November, and wage pressures were limited due to softer labor markets. Manufacturers reported a sharp deceleration in raw materials prices, and fewer producers than in previous surveys planned to raise selling prices. One contact noted that steel prices--for rebar and scrap metal--had dropped approximately 30 percent since the last survey. Overall retail prices were generally stable, but some contacts expected prices to moderate in coming months. Fewer firms than in previous surveys reported labor shortages, resulting in minimal wage pressures. Many contacts indicated wage growth in 2009 would be less than in past years due to uncertain economic conditions and lower forecasted revenue growth.
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Minneapolis