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The Tenth District economy expanded solidly in March and early April. Retail sales increased,
manufacturing activity continued to grow, and labor markets showed further
improvement. In addition, housing and energy activity rose from already high
levels. Agricultural conditions were little changed from the previous survey,
while commercial real estate markets were still generally weak. Wage and
retail price increases remained modest, but more manufacturers than in past
surveys were raising their output prices.
Consumer Spending
Consumer spending in the district increased solidly in March and
early April. Nearly all retail stores reported sizable gains from earlier in
the year. Most stores also reported very strong year-over-year sales growth,
although some of these gains were due to soft sales during the onset of the Iraq war last spring. Among product categories, sales were particularly strong for women's
apparel, electronics, and most luxury goods. Inventory levels were generally
reported as satisfactory. Heading forward, most managers are very optimistic
and plan to increase stocks to meet strong anticipated demand. Motor vehicle
sales in the district also improved compared with previous months, although
they were still somewhat lower than a year ago in most areas. Most dealers
anticipate further improvement in coming months, due in part to the spending of
tax refunds. With the recent improvement in vehicle sales, dealers were
generally satisfied with inventory levels, and many plan slight expansion of
inventories in the months ahead. Travel and tourism activity in the district
was mixed in March and early April. Airport traffic was up in most district
cities, but activity at many Rocky Mountain ski areas slowed due to lack of
adequate snowpack. Resort operators were optimistic about future tourism
activity, as summer bookings have been strong. However, some tourist
businesses that rely heavily on automobile travelers were worried about the
potential impact of high gasoline prices this summer.
Manufacturing
District manufacturing activity continued to expand in March and early April.
Most manufacturers reported higher levels of capacity utilization than in the
previous survey, and a larger number of firms said they were adding workers.
Expenditures on plant and equipment also continued to rise solidly. Most plant
managers reported continued increases in raw material prices, and many noted
longer supplier delivery times. Higher material prices continued to put
pressure on many firms' profit margins. However, more firms than in previous
surveys were able to pass some of their recent cost increases through to
finished goods prices. Expectations for future factory production and orders
remained strong, and many plants plan continued moderate increases in
employment and investment.
Real Estate and Construction
Residential real estate activity strengthened
further in March and early April, while commercial real estate markets
generally remained weak. Single-family housing starts rose solidly in most
district cities, and starts of luxury and second homes were reported to be especially
strong in some areas. Nearly all builders anticipate continued strength in
homebuilding heading forward, although limited availability and rising prices
of some building materials were a concern. Realtors reported that home sales
increased slightly in most district cities and were stronger than expected in
several areas, including Denver. Home prices continued to increase at a
moderate pace. Looking ahead, realtors expect home sales to continue to
improve and home prices to rise slightly. Most mortgage lenders reported
sizable increases in mortgage demand, due mainly to rising demand for home
purchase loans. Lenders expect continued strength in mortgage demand through
the summer. Commercial real estate activity in the district generally remained
weak in March and early April, but a few signs of improvement were apparent.
Prices for office space were flat to slightly lower throughout the district,
and vacancy rates remained high by historical standards. In addition, several
contacts reported nonresidential construction had been disrupted by rising
prices and shortages of steel. On the positive side, vacancy rates in some
cities edged down from earlier in the year, as absorption and sales of office
space rose modestly.
Banking
Bankers report that loans edged up and deposits held steady since the last
survey, raising loan-deposit ratios slightly. Demand for commercial and
industrial loans and commercial real estate loans increased, while demand for
other loan categories was little changed. On the deposit side, slight
increases in liquid accounts were offset by a decline in large CDs. All
respondent banks left their prime lending rates unchanged, and most banks also
held consumer lending rates steady. Lending standards were unchanged.
Energy
District energy activity rose in March and early April from already high
levels. The count of active oil and gas drilling rigs in the region was up
slightly from the previous survey and up considerably from year-ago levels.
Producers generally expect drilling activity to remain very strong in coming
months, as energy prices are expected to stay elevated. Most producers
reported continued shortages of drilling equipment and qualified workers, and
several contacts noted that some materials used for drilling, such as steel
pipe and sand, were becoming very difficult to obtain.
Agriculture
Agricultural conditions were little changed in March and early April from the
previous survey. Prolonged drought in the western portion of the district
continued to strain the winter wheat crop, and ranchers were concerned about
pasture conditions. In contrast, eastern areas of the district received
significant rainfall and had adequate subsoil moisture for spring planting.
With soybean prices at 15-year highs, agricultural bankers expect more soybean
planting this year than usual.
Wages and Prices
Wage and retail price increases generally remained modest in
March and early April, but an increasing number of manufacturers were raising
their output prices. Labor markets showed further improvement, as hiring
announcements by district firms continued to exceed layoff announcements.
There were also more reports of labor shortages than in previous surveys. A
number of contacts cited difficulties hiring nurses, skilled rig workers,
geologists and engineers, and some types of factory and warehouse workers.
Even so, most firms continued to have few problems hiring workers, and wage
pressures generally remained muted. Several employers noted that high benefit
costs continued to discourage them from hiring new employees. As a result,
they were focusing on retraining current employees or hiring temporary
workers. Most retailers reported flat selling prices compared with previous
surveys and expect little change in prices heading forward. One store,
however, reported increasing prices for furniture containing steel parts and
for flooring items made from petroleum-based products. Builders reported that
prices for lumber, sheetrock, and steel products rose again, and further
increases are expected. Most manufacturers reported continued increases in raw
materials prices. There were also more reports than in previous surveys of
increases in finished goods prices, especially among producers of food,
petroleum-intensive products, and steel-intensive products. Manufacturing
materials prices are generally expected to continue rising in coming months. A
growing number of firms expect to be able to pass along at least some of the
future cost increases, in part by including price-escalation clauses in new
customer contracts.
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Minneapolis