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The Tenth District economy showed continued signs of improvement in May. Manufacturing activity increased and energy activity picked up considerably. Retail sales excluding autos remained solid, while residential real estate activity was mixed. On the negative side, automobile sales fell and commercial real estate activity weakened further. In the farm economy, extreme weather caused crop damage and delayed planting. District labor markets remained slack, with wage pressures subdued. Retail prices and prices for construction materials held steady, while prices for some manufacturing materials continued to increase.
Consumer Spending
Retailers continued to report steady sales across much of the district in May, with activity remaining above year-ago levels at most stores. Sales for the month appeared to be better at luxury and discount retailers than at other stores. Sales of ready-to-wear apparel were solid, while furniture sales slowed somewhat following strong growth earlier in the year. Most retailers continue to expect activity to increase slightly in coming months. Some managers, however, reported they were reluctant to build inventories due to national security and economic concerns. The ski industry in Colorado ended its season in better shape than had been expected given the poor snow conditions that existed for most of the winter. Motor vehicle sales declined in most of the district in May, and were down significantly from year-ago levels. Sales of many domestic car models were reported to be especially weak, while sales of trucks and SUVs remained solid. Dealers were still cautiously optimistic that sales would increase in coming months.
Manufacturing
District factory activity increased in May, with most firms reporting higher levels of capacity utilization than earlier in the year. Production and shipments both moved higher and were near year-ago levels. Some plant managers also reported they were increasing inventories of finished goods in May after trimming them throughout much of the past year. The volume of new orders was slightly higher than a year ago, and managers remained generally optimistic about future factory activity. Expectations for capital expenditures have also risen slightly in recent months, but many firms remained hesitant to add new equipment and facilities. Few material availability problems were reported except for steel and steel products. However, the recent collapse of an interstate bridge in Oklahoma is expected to cause some delays of truck and barge shipments in the region.
Real Estate and Construction
Residential real estate activity was mixed across the district in May, while commercial real estate markets weakened further. Single-family construction declined in Colorado but remained solid in most of the rest of the district. Builders expect these trends to continue in coming months. Multi-family construction has slowed in several parts of the district, and some builders expect foreclosures on existing multi-family properties to increase considerably in the near future. Home sales across the district increased slightly in May. Sales of lower-priced homes were very strong, with some places described as sellers' markets. The high-end market, however, was weak in many areas. Overall, realtors expect steady home sales in the near future. Mortgage lenders reported relatively flat demand for home loans, with activity split between home purchases and refinancings. Similar to realtors, mortgage lenders expect demand to remain unchanged through the summer. Commercial realtors reported further deterioration in district office markets in May. Office vacancy rates increased, and construction, sales, and prices of office space declined in most areas. Speculative building continued to decline across the district, especially in Denver. Most commercial realtors expect activity to remain flat over the next few months.
Banking
Bankers report that loans edged down and deposits held steady since the last survey, reducing loan-deposit ratios slightly. Demand fell for commercial and industrial loans and consumer loans but was little changed for other loan categories. Some bankers attributed the decline in business loan demand to uncertainty about the economic outlook. On the deposit side, slight increases in NOW accounts and money market deposit accounts were offset by a decline in small time deposits. Almost all respondent banks left their prime lending rates unchanged, and most banks also held their consumer lending rates steady. Lending standards were unchanged.
Energy
Energy activity in the district picked up considerably in May. After reaching a two-and-a-half year low in April, the count of active oil and gas drilling rigs in the region rose by nearly a quarter during May. Energy contacts attribute some of the rebound to an expected firming in natural gas prices in coming months. According to these sources, the sharp decrease in drilling activity over the last year will lead to a significant decline in natural gas production this year, eliminating the current storage overhang and supporting natural gas prices.
Agriculture
Extreme weather throughout the district led to poor crop-growing conditions in May. Due to persistent dry weather, poor winter wheat crops were reported in western portions of the district. Dry conditions have also limited pasture growth and some cattle ranchers will likely begin feeding other forages much earlier than normal. Conversely, the eastern part of the district has received ample, even excessive, rainfall that has delayed planting of corn and soybean crops in some areas. Low crop and livestock prices have required bankers and their farm borrowers to take a cautious approach to farm debt. District bankers indicate they have not denied credit to more farm borrowers than normal, although some bankers have increased their use of government loan guarantees.
Wages and Prices
Wage and price pressures were largely subdued in May, although increased steel prices continued to be a concern for many manufacturers. District labor markets remained slack, although there were more reports of difficulty finding workers than in the previous survey. The most acute shortages continued to be for skilled health care workers, especially nurses. Skilled tradesmen, such as masons, plumbers, and electricians were also in short supply in some areas, as were experienced salespersons. Outside of these occupations, firms reported few wage pressures or difficulties in hiring workers, and layoff announcements increased after subsiding in April. Retail prices were essentially flat in May and are expected to remain steady in coming months. Prices continued to rise for several manufacturing materials, particularly steel, and some manufacturers reported they have passed the cost increases through to customers. Most plant managers expect continued increases in materials prices. Prices for construction materials were generally unchanged and are expected to remain flat through the summer.
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Minneapolis