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Economic conditions in the Tenth District continued to deteriorate in January and early February. Consumers retrenched further, shying away from durable goods and curtailing restaurant dining and travel. Manufacturing activity and capital spending weakened further, and the decline in real estate activity intensified as construction weakened further and home prices maintained their downward trend. Energy activity dampened significantly as drilling waned and rig counts hit five-year lows. Farm incomes declined with crop and livestock prices. Lack of demand and wide availability put downward pressure on prices of raw materials and finished goods, but wages and salaries remained steady.
Consumer Spending
Retail sales were lower in January and early February, and a plurality of retailers reported lower sales than expected. Sales declines were broad-based, but sales of durables such as home furnishings, lawn and garden equipment, and appliances were especially weak. Expectations were for continued sluggishness in retail sales in the near term. Mall traffic was down, as were sales in most stores. Most auto dealers reported sales declines and expected sales to retrench further over the next few months. Used cars were selling well, while sales of new cars and large vehicles were down significantly. Auto dealers continued to note tight credit conditions. Hotels unanimously reported lower occupancy rates over the previous month and airline traffic was slower in many cities; however, some recreational venues such as zoos and botanical gardens saw modest improvement, suggesting that consumers may be keeping their entertainment dollars local. Restaurant sales were down across the board.
Manufacturing and Other Business Activity
Manufacturing and other business activity contracted further in January and February with some reports of businesses closing or consolidating. Finished goods inventories shrank significantly as factories cut production. Shipments and new orders slowed since the last survey period, but a few firms reported stable or improved sales. Export orders eased slightly and were expected to slow further. Many firms have put capital spending on hold due to weak demand and difficulty obtaining financing. Both the number of workers and weekly hours were lower in most manufacturing enterprises. High-technology services was a bright spot in the District economy in January and early February. About half of contacts reported increased activity. The transportation sector continued to weaken. Most of the sustained activity was in the transport of staple products, especially food, and goods targeted to discount retailers.
Real Estate and Construction
All surveyed Realtors reported declines in home prices in January and early February, and most noted declines in sales, especially for higher-end homes. Modest improvements in sales were expected in the next three months, but Realtors expected prices to continue on their downward spiral. Although bargain prices and lower interest rates spurred some buyers to the real estate market, other potential homebuyers were waiting on the sidelines, hoping for additional government incentives. Mortgage lending was up, due largely to refinancing. Commercial construction continued to weaken significantly in January and early February, and industry professionals were pessimistic about the future. Vacancy rates were higher and absorption rates and rents were lower. Credit to commercial construction enterprises remained tight.
Banking
Bankers reported a decline in loan demand, an increase in deposits, and a modestly improved outlook for loan quality since the last survey. Demand fell for commercial and industrial loans, commercial real estate loans, and consumer installment loans. Banks continued to report tighter credit standards on commercial and industrial loans, commercial real estate loans, and consumer installment loans. Standards on residential real estate loans were generally unchanged. Assessments of current loan quality were similar to the last survey, but expectations for future loan quality improved modestly. Most respondents reported increases in deposits.
Energy
Drilling activity continued its downward trend in January and early February in the face of declining prices. All contacts expected drilling activity to fall further in the future, despite expectations of higher prices for crude oil. Contacts were split on expectations of future natural gas prices. The District rig count was down dramatically, reaching its lowest level since late 2003.
Agriculture
Agricultural conditions varied with precipitation levels in late January and February. The winter wheat crop was reported in good condition throughout Nebraska and Kansas due to adequate moisture while crop conditions deteriorated in dry areas of Oklahoma. Lack of moisture also eroded pasture conditions and limited winter forage for livestock. Farm incomes declined with lower crop and livestock prices. Loan renewals and extensions increased as some farmers decided to wait for crop prices to rebound before marketing remaining inventories. District contacts reported softer loan demand for real estate and capital purchases but expected an increase in operating loans as input costs remained elevated. Farmland values declined amid weaker farm incomes and softer demand from off-farm investors.
Wages and Prices
Hiring retrenched in January and early February as businesses struggled to contain costs and respond to faltering demand in the slowing economy. Nevertheless, wages and salaries held steady. Prices continued to ease. Raw materials were widely available for construction and manufacturing enterprises, which put downward pressure on input prices, especially for lumber. Manufacturers reported reduced prices for finished goods, and retailers largely reported lower prices as well.
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Minneapolis