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November 26, 2003
Federal Reserve Districts
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The Tenth District economy expanded further in October and early November, and business contacts were upbeat about future conditions. Retail sales continued to rise, and manufacturers reported another sizable increase in activity. In addition, the housing and energy sectors remained strong, and the agricultural sector continued to improve. While commercial real estate was still weak, contacts were somewhat more optimistic than in previous surveys. Wage and price increases generally remained modest, but employee benefit costs and some materials prices continued to rise. Consumer Spending. Retail sales in the district improved further in October and early November and were at or above year-ago levels at most stores. Among product categories, sales of home furnishings were particularly strong, while apparel sales were somewhat soft. Virtually all store managers expect holiday sales to be strong, and many stores plan more seasonal hiring than in recent years. At the same time, retailers generally have not increased store inventories as much as in past years, saying they plan to rely more heavily on just-in-time inventory management. Sales of motor vehicles also improved somewhat in most of the district in October and early November and were around year-ago levels except in Colorado, where sales remained sluggish. Despite aggressive manufacturer incentives, most dealers reported that sales improved more for used cars than for new cars since the last survey. Nearly all auto dealers expect vehicle sales to continue to improve in coming months. Tourism activity in the district was mixed in October and early November. Convention business in Denver remained strong and airport traffic was up in most cities. However, activity at some leisure destinations was weaker than a year ago. Tourism contacts were generally positive about the winter travel season, as advance bookings were above year-ago levels in most locations. Manufacturing. District manufacturing activity continued to expand strongly in October and early November, and expectations for future output improved further. Plants generally reported higher levels of capacity utilization than in the previous survey, and the volume of new orders continued to rise. Most firms cited longer workweeks and increased productivity as the primary means of boosting output since the last survey, while several firms also reported modest increases in hiring. One manufacturer of chemical products also noted that, due to strong recent increases in demand, it would continue operating several plants it had previously planned to close. Some manufacturers reported slight difficulties obtaining steel, aluminum, and chemicals, but they generally do not expect these difficulties to continue. Capital spending was above year-ago levels for the second straight survey following several years of shrinking investment. A substantial majority of plant managers expect factory activity to continue to rise in the months ahead, and many plan further investment in plant and equipment. Real Estate and Construction. Residential real estate activity in the district remained strong in October and early November, and commercial real estate contacts expressed increased optimism that office markets were bottoming out. Single-family housing starts maintained a solid pace in most district cities, with starts of entry-level homes remaining quite strong in most of the district. Contacts in a few cities also reported a slight uptick in luxury home construction, but high-end building remains weak in most areas, and particularly in Colorado. Most builders expect single-family construction to edge higher in coming months. Several builders again reported slight difficulties obtaining plywood, but they reported no other material availability problems. Home sales remained near record levels in most of the district in October and early November but eased slightly from the rapid growth experienced during the summer. Most realtors expect sales to remain strong for the rest of the year. Mortgage lenders reported a decline in overall mortgage demand, primarily due to another sharp drop in refinancings. Lenders generally expect refinancings to continue to edge lower and for home purchase loans to hold steady in the months ahead. Most commercial real estate markets in the district remained weak in October and early November. Sales and absorption of office space were generally flat, and vacancy rates were largely unchanged. However, the outlook for office markets in some district cities has improved since the previous survey. Several commercial realtors expect vacancy rates to edge down in coming months and for office construction to pick up slightly. Banking. Bankers report that loans and deposits both increased slightly since the last meeting, leaving loan-deposit ratios largely unchanged. Demand edged up for commercial and industrial loans, commercial real estate loans, and home equity loans. Demand for home mortgage loans fell slightly, reflecting the slowdown in refinancing activity, while demand for consumer loans and agricultural loans remained unchanged. On the deposit side, all types of accounts rose except large CDs, which held steady. All respondents left their prime lending rates unchanged since the last survey, and most banks also held their consumer lending rates steady. Lending standards were generally unchanged. Energy. District energy activity was strong in October and early November, as energy prices remained high. The count of active oil and gas drilling rigs in the region was about even with the previous survey and over 50 percent higher than a year ago. Several energy contacts reported that a shortage of drilling rigs had boosted the cost of renting equipment in recent months. Most contacts anticipate drilling activity will remain strong through the winter, as oil and gas prices are expected to stay elevated. Agriculture. Agricultural activity continued to strengthen in the district in October and early November. Cattle prices posted new record highs, and producers took advantage of the strong prices by marketing more cattle than expected. The fall crop harvest was nearly complete, and areas that enjoyed late-summer rains were reporting above-average corn yields. Fall rains have also improved winter wheat crop conditions. In general, pasture conditions across the district were fair, and forage supplies were adequate for winter. On the negative side, the summer drought cut soybean yields to below-average levels, and pockets of financial distress persisted in several areas that experienced prolonged drought. Wages and Prices. Wage and price increases generally remained modest in October and early November, but employee benefit costs and some materials prices continued to rise. Labor markets were still slack around the district, although a few manufacturers reported difficulties finding skilled mechanics and mechanical engineers and some energy firms had problems finding skilled rig workers. Layoff announcements continued to ease, and a number of businesses indicated plans to increase hiring. Wage increases remained modest, with most firms continuing to offer only cost-of-living increases. However, benefit costs continued to rise rapidly. Several employers reported shifting more of the cost of health insurance on to employees, and some small businesses have eliminated health care benefits entirely. As for prices, retailers reported little change from the previous survey and they expect prices to be flat to slightly higher over the holiday season. However, some business contacts worry that the lack of inventory building by retailers could result in upward price pressures if holiday demand cannot be satisfied by just-in-time ordering. Some builders and manufacturers reported rising plywood, brick, cement, and steel prices, and they generally expect some modest price increases to continue. Manufacturers again reported a firming in finished goods prices, and they increasingly expect some ability to raise their output prices in the future.
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