The Tenth District economy showed further signs of modest growth in January and February. However, some unexpected weakness was noted in several sectors of the District economy due to bad weather. Consumer spending was flat compared to year ago levels with continued softness in auto sales. Manufacturing activity expanded but did not translate into additional factory hiring. Residential real estate markets continued to benefit from tax credits, while commercial real estate weakened further. District banks reported continued weak loan demand. Energy firms expanded drilling activity, especially for natural gas. In agriculture, growing conditions remained favorable for crops, while profit margins improved for livestock producers. Despite higher input prices, retail prices remained unchanged and little evidence of wage pressures was reported in District labor markets.
District retailers reported that sales in January and February were weaker than expected and flat relative to last year. Retailers with highly seasonal post-holiday sales noted particular weakness. Some District retailers, especially mall operators, attributed the weakness in sales to winter storms. Retailers nonetheless remained optimistic that a rebound in retail activity will occur in the coming quarter. Light car and truck sales remained in a downward trend but inventories continued to decline and few auto dealers expressed concern with excess inventory levels. The lodging industry noted improved hotel occupancy rates in the January and February survey period. Some hoteliers indicated that the occupancy bounce was likely seasonal in nature but reported improved expectations for both occupancy and room rates. Mountain resort markets registered only a modest rebound in winter tourism relative to year ago activity.
Manufacturing and Other Business Activity
The Tenth District's manufacturing and transportation sectors expanded further, although high-tech firms reported weaker business conditions. District manufacturers reported increased production, shipment volumes, and new orders in the latest survey period. District manufacturing activity has increased steadily since last September and production has returned to near year ago levels. Manufacturers remained optimistic that new orders would be higher in six months; however backlogs were minimal and well below year ago levels. Few manufacturing firms increased hiring, though expectations for
future hiring improved markedly in the latest survey period. Transportation firms reported a strong cyclical rebound in business activity consistent with continued stabilization in overall District activity. High-tech firms noted weaker business activity along with subdued expectations for improved business conditions in the coming quarter. Current and future expectations of capital spending activity among high-tech firms also diminished in the survey period. The lack of venture capital funding remained a concern for high-tech companies, especially among alternative energy and software development firms.
Real Estate and Construction
Residential real estate activity improved slightly while commercial real estate continued to deteriorate. Residential builders reported increased building permits and housing starts. Sales in residential real estate increased modestly but home prices in the District remained flat. Demand remained strong for starter homes but the strength was not expected to continue once the homebuyer tax credit expires in April. Upper end home sales remained depressed. Mortgage refinancing activity decreased amid increasing interest rates. Construction supply firms noted increased activity in residential construction but no movement in commercial. Commercial real estate respondents reported anemic conditions, including decreasing sales volumes, rents and prices, and increasing vacancy rates with little to no expectation of conditions improving in the next quarter. Weakness in commercial construction during the survey period was attributed to poor weather in January and February, while tight lending conditions continued to be cited throughout the industry as an impediment to long run growth. Real estate and construction contacts reported limited contribution from stimulus-funded projects to business activity or hiring in the reporting period.
Bankers reported lower loan demand, unchanged deposits, and a slightly improved outlook for loan quality. Overall loan demand declined at about the same pace as in the previous survey. Demand fell moderately for commercial and industrial loans, commercial real estate loans, and consumer installment loans. Demand for residential real estate loans declined modestly. A few banks tightened credit standards on commercial real estate loans but credit standards for other loan categories were little changed. Somewhat fewer banks than in the previous survey reported a decline in loan quality from a year ago. Respondents were also slightly less pessimistic about loan quality in the next six months. For the second consecutive survey, deposits were unchanged. A few respondents said they had little incentive to obtain
deposits due to lack of loan demand.
Energy industry activity continued to expand in the latest reporting period. Natural gas producers expressed cautious optimism that a near term floor had been established for natural gas prices but remained concerned that expanding supplies from shale gas production would push prices down in the future. District rig counts continued to increase in the latest reporting period with improved expectations for drilling-related capital expenditures in the coming quarter. New drilling activity was largely concentrated in horizontal gas wells in Oklahoma. Wyoming coal production remained more than ten percent below year ago levels.
Agricultural conditions improved since the last survey period. The winter wheat crop was reported in generally good condition with limited reports of freeze damage due to frigid temperatures and variable snow cover. Extreme winter weather contributed to below average weight gain for cattle and caused producers to provide supplemental feed. Cattle and hog prices strengthened in recent weeks, boosting profit opportunities. Crop prices edged down from their post-harvest peaks. Still, cropland values strengthened following the bumper fall harvest. Ranchland values, however, remained below year-ago levels amid weak demand for pasture ground. Stronger farm incomes led to a rise in loan repayment rates and fewer reports of loan renewals and extensions. District contacts reported ample funds were available for farm loans at historically low interest rates.
Wages and Prices
Raw materials prices increased although selling prices and wages remained flat. District manufacturers reported raw materials prices pushed above year ago levels in the latest survey period. Two-thirds of District manufacturers expected the upward trend in raw materials prices to continue into the next six months. Selling prices remained flat across the District since the last survey period but were generally below a year ago. Most respondents expected prices to hold steady over the next few months. Firms continued to report little evidence of wage pressures across District labor markets and did not expect any pressure in the near future.