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The Tenth District economy improved somewhat in June and early July. Retail sales rose slightly, manufacturing activity increased, and the pace of layoff announcements continued to ease. In addition, housing and energy activity remained strong. Commercial real estate markets, on the other hand, were still weak. In the farm economy, abundant spring rains eased drought conditions in much of the district. Most prices held steady, and wage increases remained minimal.
Consumer Spending
Retail sales in the district continued to edge higher in June and early July. The improvement pushed sales up to or above year-ago levels at most stores. Among product categories, sales of home appliances were generally strong, while furniture sales weakened somewhat. Most managers anticipate continued modest increases in sales through the fall. Managers were generally satisfied with stock levels and expect typical inventory building for the back-to-school season. Motor vehicle sales continued to improve in most of the district in June and early July, although inventories remained relatively high. Vehicle sales in Colorado, however, were quite sluggish, and some dealers there reported record-high inventories. Several contacts also reported that used car values have fallen considerably in recent months due to a glut of used vehicles on the market. Nearly all dealers were optimistic that sales of new vehicles will remain strong or improve in coming months and were not overly concerned about high inventory levels, given current low interest rates. Travel and tourism activity increased in most of the district in June and early July. Passenger traffic rose at most airports in the district, and convention business in Denver was reported to be very strong. Activity at most family destinations in the district was also solid, although wildfires in northern New Mexico were hampering travel to that area.
Manufacturing
District manufacturing activity improved somewhat in June and early July after easing in the spring. Production and new orders moved back above year-ago levels, and firms reported slightly higher levels of capacity utilization than in previous months. Both durable- and nondurable-goods producing plants shared in the increase in activity since May. In addition, factory employment levels remained largely unchanged for the second straight survey, following declines throughout the past year. On the negative side, capital spending fell somewhat further below year-ago levels. However, plans for future investment continued to edge up, as overall optimism about future factory activity remained high. Plant managers reported virtually no difficulties in obtaining materials and do not anticipate availability problems heading forward.
Real Estate and Construction
Residential real estate activity remained strong in most of the district in June and early July, while commercial real estate activity was still sluggish. Single-family housing starts continued at high levels in most district cities, with strong starts of entry-level homes making up for weak construction of upper-end homes in some markets. Builders expect the overall pace of new home construction to hold steady in coming months. Home sales continued to increase in much of the district in June and early July, although inventories of unsold homes remained higher than a year ago in many cities. Most realtors expect home sales to remain solid in coming months. Mortgage demand increased slightly and was considerably higher than a year ago throughout the district. As in past surveys, most of the demand was for refinancings. Lenders generally expect mortgage activity to remain strong in the near future. Most commercial real estate markets showed little change from the previous survey, when realtors reported some signs of stabilization. In Denver, however, realtors reported that sales and absorption of office space continued to edge down and vacancy rates rose slightly. Most realtors expect commercial real estate activity to be sluggish throughout the remainder of the year and do not expect excess office space to be fully absorbed for at least another year and a half.
Banking
Bankers report that loans held steady and deposits rose since the last survey, reducing loan-deposit ratios somewhat. Demand for home mortgage loans continued to increase, offsetting small declines in demand for consumer loans, business loans, and commercial real estate loans. On the deposit side, demand deposits, NOW accounts, and money market deposit accounts all rose slightly. Almost all respondent banks lowered their prime lending rates and consumer lending rates since the last survey. Lending standards were generally unchanged, although a few bankers expressed concern that declining used car prices were hurting credit quality by reducing collateral values on auto loans.
Energy
District energy activity held steady in June and early July after increasing markedly during the first five months of the year. From late May to mid-July, the count of active oil and gas drilling rigs in the region was virtually unchanged but still considerably higher than a year ago. Natural gas prices began to edge downward in mid-June, while oil prices have largely remained unchanged. In Wyoming, a moratorium on new coal-bed methane drilling permits was lifted in mid-July, leading to predictions of increased production of natural gas in that state in coming months.
Agriculture
In the farm economy, abundant spring rains eased drought conditions in much of the district. The spring moisture contributed to an above-average winter wheat crop and to favorable conditions for spring-planted crops. Pasture conditions have improved from last year, but most cattle producers have been unable to expand their herds. While drought conditions have eased, the arrival of hot, dry weather in July raised some concern about possible deterioration of pastures and spring-planted crops going forward. District bankers report that farmers' cash flows have been better than projected but are recovering only slowly. Livestock producers are expecting a better year due to stronger market prices and improved pasture conditions.
Wages and Prices
Wages and prices remained relatively stable in June and early July, although prices for some manufacturing materials continued to increase. Labor markets were still quite slack around the district, with most managers reporting few difficulties filling open positions, even for skilled employees. However, the pace of layoff announcements eased further in June and early July, suggesting the labor market may be turning the corner. Wage growth remained largely unchanged from the previous survey, with most firms continuing to provide no more than cost-of-living wage increases. Rising employee benefit costs continued to be a concern for many firms, and some employers said they were passing more of the cost of insurance and pensions on to employees. Retailers reported some discounting of prices to clear out seasonal items, but overall prices were virtually unchanged from the previous survey. Retail prices are expected to remain stable in coming months. Manufacturers reported little change in finished goods prices and do not anticipate much change heading forward. However, transportation and energy costs, as well as prices for some petroleum-based materials, continued to edge higher. Builders reported a slight rise in prices for some construction materials, including lumber, but no further increases are expected.
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Minneapolis