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The Tenth District economy expanded at a moderate pace in the June and early July survey period. Consumer spending rose solidly and was especially strong among restaurants and auto dealers. Factory production rebounded from weakness in the prior survey period, and high-tech and transportation services firms reported continued growth. District bankers reported weaker loan demand but increased deposits and improved loan quality. Weak home sales and expanded inventory levels further pressured single-family home prices, while commercial real estate activity remained slow but stable. Activity in the energy sector was robust as drilling expanded in most District states. Conditions in agriculture were generally strong. Rising input costs were reported in several sectors, but wage pressures were limited to select industries and occupations.
Consumer Spending
Consumer spending increased at a solid pace in June and early July, and most contacts expected sales gains in the months ahead. Auto dealers reported strong sales despite reduced incentives, with demand strongest for small, fuel-efficient vehicles. Dealers noted the continued benefit of low interest rates on sales and attributed some of the recent sales boost to tornado damage in areas of Oklahoma and Missouri. Car and light truck inventory levels were reported as generally satisfactory, although shortages remained for some Japanese nameplates due to the tsunami. Restaurant sales accelerated in June, and the outlook for the coming three months remained strong. However, restaurant profit margins were pressured by increased food costs and a further decline in the average check amount. General retailers in the District reported flat sales in the survey period, but activity remained well above year-ago levels. Current retail inventories were viewed as adequate, but many retailers planned to expand inventory in the coming months. Sales of low price consumer goods were strong, while sales of many luxury items remained sluggish. District tourism visitor counts were generally up, especially at Colorado mountain resorts, but were slowed by wildfires and drought in northern New Mexico. District hoteliers reported increased occupancy and daily room rates.
Manufacturing and Other Business Activity
Tenth District manufacturing activity rebounded from weakness in the prior survey period, while high-tech and transportation activity expanded further. Factory operators reported that both production and shipments bounced back following weakness in May. The outlook among manufacturers remained positive as new orders and backlogs similarly rebounded. Inventories of finished goods were stable. Factory employment increased in June for the eighth consecutive month and the average workweek expanded slightly. Raw materials costs increased and put upward pressure on finished goods prices. Factory operators also indicated slightly weaker capital spending plans in the coming six months. Transportation services firms reported increased activity in the current survey period and were optimistic about future bookings. Several trucking contacts cited continued difficulty attracting qualified over-the-road drivers. Sales growth was strong at high-tech firms despite some downward price pressure. High-tech firms remained optimistic about future sales gains and planned to increase capital spending in coming months.
Real Estate and Construction
Excess inventory weighed on single-family home prices, while commercial real estate remained weak but stable. Real estate firms reported flat existing home sales, higher home inventory, and lower home prices in June and early July. Contacts reported an increased share of existing home purchases by investors in all-cash transactions. Expectations for improvement in the housing sector were subdued. Home builders reported little new construction activity but noted increased buyer traffic. Entry-level homes sold well, along with high-end homes in some Colorado mountain resort communities. Apartment managers reported higher rents and lower vacancy rates. In commercial leasing, absorption and vacancy rates were flat, and only small declines in rent and prices were reported. Further declines in rent and prices were expected and overall commercial leasing terms continued to favor tenants. Commercial construction remained stable but weak, with strength reported in multi-family residential projects. Builders indicated that access to credit improved slightly. Construction supply firms reported increased sales since the last survey, though inventories increased. Construction materials prices remained steady excluding petroleum-based products.
Banking
In the recent survey period, bankers reported weaker loan demand but increased deposits and improvements in loan quality. Overall loan demand was slightly weaker than in the previous survey. Demand for residential real estate loans was unchanged, while demand for commercial and industrial loans, commercial real estate loans, and consumer installment loans decreased. Credit standards remained unchanged in all major loan categories, and deposits increased for the fourth straight survey. Bankers reported improvements in loan quality compared with a year ago and in the outlook for loan quality over the next six months.
Energy
District energy activity expanded at a solid pace since the last survey, and contacts expected continued growth in coming months. Drilling activity expanded in most District states, however extended permitting delays were noted on Bureau of Land Management sites in Wyoming. Oil and gas contacts expected little change in crude oil and natural gas prices in the coming three months. Energy firms increased hiring in the current survey period but reported difficulty finding qualified workers. Availability of equipment remained a constraint to expansion, but financing was viewed as adequate. Weak coal production in the Powder River Basin kept output well below year-ago levels. Ethanol production edged up with slightly higher prices and profits this summer.
Agriculture
Agricultural conditions varied with weather and input costs. Poor pasture conditions due to drought in the Southern Plains prompted increased placements of cattle in feedlots. However, initial reports on wheat yields in drought areas of Kansas and Oklahoma were poor but better than expected. The corn and soybean crops were progressing normally and generally rated in good or better condition, especially in Nebraska. Agricultural commodity prices remained high but volatile in recent weeks, shifting with export and production forecasts. Rising feed costs trimmed margins for livestock producers. Higher prices for fertilizer, fuel, and feed boosted farm loan demand. Elevated crop prices fueled further gains in District cropland values.
Wages and Prices
District contacts reported only limited wage pressures but noted additional upward pressure on input prices. Labor shortages and wage pressures were reported in the retail sector and for select occupations in the high-tech, energy, and transportation sectors. In addition, several contacts expected future non-wage employment costs to rise as a result of increased state unemployment insurance premiums. Manufacturers reported continued upward pressure on input costs; slightly fewer manufacturers reported increased finished product prices. Builders reported higher overall prices for construction materials, and transportation contacts remained concerned about the impact of high fuel costs on profit margins. Expectations across most industries were for further input price increases in the coming three months. Restaurants had raised menu prices since the last survey and expected further increases in the coming months.
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