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The Tenth District economy remained somewhat weak in May. Retail sales were flat, manufacturing activity continued to slow, and commercial construction showed little change from previous surveys. On the positive side, residential construction continued to edge higher and energy activity continued to expand. In the farm economy, the district's winter wheat crop was in poor condition. District labor markets appeared to ease further, especially for retail workers, and reports of wage pressures were rare. Retail prices and prices for construction materials held steady, while prices for some manufacturing materials edged lower.
Retail Sales
Retail sales were basically flat in May, and up only slightly from a year ago. Women's clothing sold well, as did outdoor furniture. Sales of men's clothing were generally weak. Retailers trimmed inventories but remained generally satisfied with current stock levels. Expectations of summer retail sales have weakened somewhat since the previous survey. Motor vehicle sales resumed declining in May after improving in the previous survey, and were down from a year ago throughout the district. These weaker conditions have led to the closure of a few dealerships. Many dealers noted that sales of SUVs and pickup trucks were down due to higher gasoline prices. Despite the fall in sales, inventories of unsold cars also declined, and most dealers remained satisfied with their inventories. Expectations of vehicle sales in the summer were cautiously optimistic.
Manufacturing
District factory activity weakened further in May, as fewer firms operated at a high level of capacity utilization than in previous surveys. Lead times were unchanged and no material availability problems were reported. Inventories rose slightly due to weaker sales, and many plant managers reported that their current stock levels were higher than desired. Most managers hope to trim inventories during the summer.
Real Estate and Construction
Residential construction activity continued to expand modestly in May, while commercial building remained flat. Housing starts rose slightly from April but remained largely unchanged from a year ago in most of the district. Builders expect a general leveling out of residential construction in coming months. Sales of new and existing homes were flat, and inventories of unsold homes reached record levels in some areas, particularly for luxury homes. Mortgage demand weakened, primarily due to a slowdown in refinancing activity, although activity remained higher than a year ago. Most lenders expect the mortgage market to weaken further. Commercial construction activity has remained roughly constant since the previous survey. Absorption rates have remained steady and vacancy rates have increased only slightly. However, Realtors indicate that vacancy rates would be higher if the subleased space that has come onto the market in recent months were included.
Banking
Bankers report that loans and deposits both increased since the last survey, leaving loan-deposit ratios unchanged. Demand rose for all loan categories except commercial real estate loans and agricultural loans. On the deposit side, demand deposits and NOW accounts both increased, outweighing a small decrease in large CDs. All respondent banks reduced their prime lending rates, and most also decreased their consumer lending rates. Most respondents said they did not expect to adjust these lending rates further in the near term. Lending standards were generally unchanged.
Energy
Energy activity in the district continued to expand rapidly. The count of active drilling rigs rose further in May to reach a new 11-year high, as energy prices remained high by historical standards. Energy firms continued to lure rig workers back to the industry as rapidly as possible, but shortages of workers and rigs continued to restrain drilling activity.
Agriculture
Much of the district's winter wheat crop was in poor condition due to the dry autumn and harsh winter, and recent rainfall has slowed planting of the district's spring crops. Strong livestock prices have encouraged some ranchers to expand their cattle herds, but the expansion has been limited by the high price for replacement breeding stock. Despite strong livestock prices, district bankers expect low crop prices and high fuel and fertilizer costs to hold down farm incomes this year. As a result, bankers are keeping a close watch on their farm loans. With farm incomes still weak, small business activity in rural areas has slowed from a year ago.
Wages and Prices
District labor markets appeared to ease further in May, although the market for skilled workers remained tight. Many small construction contractors continued to have problems finding tradesmen, and some kinds of manufacturing jobs remained difficult to fill. On the other hand, the market for retail workers has loosened considerably in recent months, with one source reporting a flood of applicants. Wage pressures were virtually nonexistent outside of the energy sector. In some contract negotiations, workers are now reportedly favoring the increased security of longer contracts over higher wages. Retail prices held steady in May, although there were continued concerns about the effect of rising transport costs. Prices for some manufacturing materials, such as steel and plastics, edged lower. However, high transportation and petroleum costs remained a concern. Overall, most purchasing managers expect material prices to remain steady throughout the summer. Building material prices remained largely unchanged.
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Minneapolis